The general consensus on the CNY seems to be that the government controlled currency won’t weaken too much over the course of this year as the government doesn’t want to provoke conversations about having a too weak currency whilst fending off Trump tariff threats as well. The other side of the coin is that the government may not want to ‘lose face’ either as a weak currency can sometimes be seen as a failing government or economy.
This consensus may be wrong of course, and there are many reasons for thinking that the risk is that the CNY weakens a lot vs. major FX rates this year. One argument against a softening currency is that it may spur inflationary pressures. In China’s case, with disinflation turning into deflation risk, a bit of inflationary price pressures may be a good thing. The argument against letting the CNY weaken as this would provoke trade disputes may be small beer when the risk of 60% or higher tariffs from the biggest trade partner is being bandied about. Taking a look at the charts may help.
The monthly USD/CNY chart below (with 12 and 60-month moving averages) shows the current pressure above 7.3. Sustained gains through here are expected to set up 7.8 and then 8.0 for 8.3 in time.
So far, so weak CNY. But the EUR/CNY chart (below) shows a different story.
This chart shows the CNY being a bit strong, trading at the 60-month moving average. The risk is that the soft EUR falls from near 7.5 to near 7.0. We don’t have a soft EUR view, and if the CNY is allowed to weaken vs. their basket of trading currencies, the EUR may be able to bounce back to 8 here. On the chart a turn above the 8 zone would set up 8.30 for 8.60. Plenty of room to weaken here.
The chart below shows the AUD/CNY. Here too it is clear that the CNY is not particularly weak. The chart risk is that the 4.45 area gives way and the CNY firms towards 4 again. Ideally, the AUD will regain some mojo and bounce back to the falling line near 4.9, setting up a potential break to 5.2 and then 5.4.
The final chart is one that we have looked at before, the CNY/JPY cross rate (below). The JPY has been very weak for some time here (and vs. most other FX rates). The trend risk is that the JPY remains weak. However, we are still looking for USD/JPY to end the year below Y140 and closer to Y130, rather than Y180+. This could allow the JPY to firm vs. the CNY with a shift back to Y20 expected, and some room for Y18.75 seen.
In summary, USD/CNY is up but this is mostly a strong USD story. At some stage the Chinese government/PBoC may swallow their pride and note the strong CNY vs. other currencies, and let the CNY weaken accordingly. Financial media headlines will focus on the USD gaining more ground, but in reality the CNY will be shifting from relatively strong levels vs. other important currency rates, to slightly softer levels – reflecting the weak Chinese economy.
Gerry Celaya
Chief Strategist
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