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16 Dec 2014
Is USD/CNH worth chasing higher? – Westpac
FXStreet (Barcelona) - Jonathan Cavenagh of Westpac provides an update for CNY/CNH into early 2015, noting that although USD/CNY/CNH is set to become stronger into early 2015, the unwillingness of the authorities to see higher levels in the above currencies hazes the upside outlook.
Key Quotes
“From an economic perspective China's weaker activity outlook is crying out for easier financial conditions. Coupled with a strong deflationary impulse and the scene seems set for a fresh wave of USD/CNY/CNH strength into the early parts of 2015.”
“However, in this piece we argue that the outlook is perhaps not that clear cut. We argue that the fixing bias remains entrenched in a negative bias, which suggests the authorities are not willing to 'sponsor' higher levels in USD/CNY/CNH.”
“This is likely to reflect China's strong structural current account surplus position, a desire to avoid strong capital outflow pressures and to maintain positive momentum around the internationalisation of the Chinese currency.”
“These factors, along with prohibitive carry costs, make shorting CNY/CNH at current levels an unattractive proposition in our view.”
“If anything, we wouldn't be surprised to see both onshore (USD/CNY) and offshore (USD/CNH) spot rates correct lower at some stage, particularly if there remains such a large disparity between these rates and the onshore fixing rate.”
“Playing for such an outcome via short USD positions is perhaps not the best risk/reward strategy in our view but we continue to like long CNY/CNH positions on an intra-Asia basis, particularly against the likes TWD.”
Key Quotes
“From an economic perspective China's weaker activity outlook is crying out for easier financial conditions. Coupled with a strong deflationary impulse and the scene seems set for a fresh wave of USD/CNY/CNH strength into the early parts of 2015.”
“However, in this piece we argue that the outlook is perhaps not that clear cut. We argue that the fixing bias remains entrenched in a negative bias, which suggests the authorities are not willing to 'sponsor' higher levels in USD/CNY/CNH.”
“This is likely to reflect China's strong structural current account surplus position, a desire to avoid strong capital outflow pressures and to maintain positive momentum around the internationalisation of the Chinese currency.”
“These factors, along with prohibitive carry costs, make shorting CNY/CNH at current levels an unattractive proposition in our view.”
“If anything, we wouldn't be surprised to see both onshore (USD/CNY) and offshore (USD/CNH) spot rates correct lower at some stage, particularly if there remains such a large disparity between these rates and the onshore fixing rate.”
“Playing for such an outcome via short USD positions is perhaps not the best risk/reward strategy in our view but we continue to like long CNY/CNH positions on an intra-Asia basis, particularly against the likes TWD.”