The USDCNH‘s powerful trend wasn't questioned in January-June 2023, but the situation has changed since July. Why? Let’s discuss that and make a trading plan.
Monthly fundamental forecast for yuan
The second half of 2023 promises to change the mood of the yuan's fans. Banks make bearish forecasts for the USDCNH, believing that Beijing will do anything to reach a 5% growth target for GDP in 2023 and the Fed is nearing the end of tightening.
China was a disappointment in 2Q. The economy grew by as little as 0.8% from one quarter to the next and came in worse y-o-y than Bloomberg expected. There are three factors in such a slow recovery.
China’s GDP dynamics
First, week foreign demand. China's industry suffers as rates in developed economies rise, and consumers turn more to services. Second, week consumer confidence. It explains why retail sales are disappointing despite significant savings accumulated during the pandemic. Finally, business investment is depressed amid tighter regulation.
I suppose the three factors can be won back in the second half of the year. If the US avoids a recession, demand for Chinese goods will recover. Consumers will gradually forget about COVID-related fears, and business investment will finally push off from the bottom. Thus, the Chinese economy can pleasantly surprise us even with minimum stimuli.
Investors say more and more often that the USDCNH has reached its ceiling. According to BNP Paribas, the pair will stabilize at 7.1-7.4 in 3Q and then fall to 6.95 amid lower bond yields. UBS Wealth Management believes the interest rate differential between the two countries will remain at the same level without putting pressure on the yuan because the People's Bank will scrap unjustified easing while the Fed will end tightening in July. As a result, the USDCNH will drop to 6.9 by the end of 2023.
The expansion of the bond yield differential between the US and China led to a flight of capital from China's bond market in the first half of 2023, but the process stopped in July.
Yield gap and capital flows
The PBoC is acting rationally. It won't knock the economy down by huge stimuli just to reach a 5% GDP growth target, as that would drop the yuan even lower. At the same time, the divergence won't support the USDCNH bulls any longer as the Fed's tightening cycle will end soon.
Monthly trading plan for USDCNH
The pair has a good chance to decline on downbeat data for GDP in 2Q, which is a perfect opportunity for us to sell it. The bear targets for the USDCNH are at 7.05 and 6.98.
Price chart of USDCNH in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.