The USD/CNY pair recently broke below the significant 7.2 level, making a push towards the 7.1 handle due to a surge in volatility and a carry trade unwind. This move likely caught onshore firms and exporters off guard, exacerbating the price action as they sold USD/CNY and USD/CNH spot to quickly unwind their carry positions, according to TDS FX and macro strategist Alex Loo.
USD/CNY Expected to Reach 7.40 by Year-End
Loo anticipates further unwinding, which could sustain a short-term CNY rally as exporters have likely accumulated substantial long USD positions. This is due to firms not converting their USD proceeds for some time, given the low conversion ratio and settlement balance trends.
However, Loo suggests that USD/CNY has a floor at 7.1. He predicts that the People’s Bank of China (PBoC) will soon shift its stance, allowing the CNY to weaken further, despite recent efforts to fend off depreciation pressures. The stronger-than-expected fixing deviation fell sharply to 136 pips recently, indicating a potential return to weaker-than-expected fixings.
While a value rotation to Asia’s low yielders might be plausible amid the carry blowup, Loo doubts investors will significantly increase CNY long positions. Composite data trends, surprises, and consensus revisions indicate China still lags behind the US, which is bearish for the CNY. TDS maintains a long USD conviction, projecting an eventual move towards 7.40 for USD/CNY by year-end.
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