USD/CNY poised for further upside – Danske Bank

Allan von Mehren, Chief Analyst at Danske Bank, believes the Chinese currency could extend its gradual way lower.

Key Quotes

“We look for the CNY to weaken gradually against the USD as the Fed resumes raising rates and China resumes easing monetary policy in 2017. However, we do not expect a bigger devaluation, as the CNY is not overvalued and China wants stability in its currency. Against the EUR, we expect CNY to depreciate close to 10% over 12M”.

“The CNH-CNY spread has been quite stable since calm was restored in February. We expect the spread to stay at around zero or slightly above throughout the forecast horizon. Hence, we expect basis risk in hedging CNY exposure through CNH to be limited. If the spread moves out, we believe the PBoC is likely to use higher CNH money market rates (by draining liquidity) to pull it down close to zero again”.