The end of a weak CNY? – Danske Bank

Thomas Rosenlund, Analyst at Danske Bank, raises the question of whether the recent price action in CNY marks the end of the declining trend of the Chinese currency.

Key Quotes

“In FX markets, the short squeeze in USD/CNH has continued, as it seems China has been successful in stemming the near-term outflows by among other things draining offshore liquidity. This leaves the question of whether this marks the end of the weakening trend of the CNY”.

“In our view, China has won the first ‘battle’, but it is still too soon to conclude that China has won the ‘war’. We still expect rates to come down again eventually, when China judges the immediate risk of acceleration in outflows as having eased more sustainably”.

“The lower USD/CNY and USD/CNH also comes after a period of a sharp move higher, and as such does not change the trend”.

“The fundamental pressures speaking in favour of a weaker CNY are still very much in place: (a) very high debt, which will force rates to stay low for a long time to keep debt servicing costs down, (b) rising financial vulnerability from a build-up of debt and growth of shadow banking, (c) our expectation of slower growth in 2017 and finally (d) the Fed raising rates further this year on the back of stronger growth and rising inflation”.