Fundamental Forecast for CNH: Bearish
- US and China’s tariffs will enter effective next week; more are likely on the way.
- In the near term, corrections may be seen in the Yuan while the bearish trend holds.
- The Caixin PMI gauge may reflect smaller firms’ conditions, which is PBOC’s top focus.
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The Chinese Yuan lost more than 1000 pips both onshore and offshore against the U.S. Dollar this week, amid the PBOC’s RRR cut as well as the on-going US-China trade war. Clouds around the Chinese stock market remained as well: The Shanghai Composite Index dropped -1.47% this week. The weak Yuan contributed to losses in Chinese equities, especially dragging down airline stocks.
The Chinese Yuan and equities may continue to bear bearish pressure in the coming week, from the US-China trade battles. On July 6, the U.S. customs will begin to charge additional tariffs on $34 billion Chinese goods. China plans to retaliate on the same amount of U.S. goods on the same day. Based on US President Trump’s threat, this will lead to another around of battles, on additional $200 billion goods.
Signals have hinted that the time frame of this war has expanded. China has prepared itself for U.S. tariffs attacks: it will lower imports of agriculture products, aquatic products, energies, and raw materials from Asian countries, effective on July 1. In specific, the tariff on soybean will be cut from 3% to 0%. Soybean is one of the major U.S. products that China targeted at. Within such context, a relative weak Yuan may help to make up for some loses of Chinese exporters due to the increased tariffs.
At the same time, the Chinese currency has been falling at a rapid pace, and may be too fast from a regulator’s point of view. Coupled with the tumbling Chinese equities, it may have raised the regulator’s concern on financial stability. Also, Yuan’s overnight borrowing cost saw increased in the offshore Hong Kong market on Friday. Taking into account all these above, a retracement in the Yuan is possible in the near term.
In addition, economic event risks could elevate volatility in the Yuan. China will release the official manufacturing PMI and Caixin PMI prints for June. $34 billion Chinese goods, which added bearish momentum in the Yuan. Caixin PMI is in specific worth to watch, as it could reflect the condition of smaller-sized firms. The PBOC’s RRR cut this week was target at them. Therefore, their performance may largely impact the Central Bank’s monetary policy.
— Written by Renee Mu, Currency Analyst with DailyFX