USD/CNY: Risk stays on the upside - Westpac

According to Frances Cheung, Research Analyst at Westpac, risk to USD/CNY stays on the upside, with the next resistance at 6.96, on lingering trade conflicts and the diverging monetary policy between China and the US.

Key Quotes

“July data already shows some softness in economic activity, the development on which the market will watch closely.”

“The latest outsized granting of MLF (medium-term lending facilities) by the PBoC suggests that liquidity may stay ample in the CNY market. This leads to downward pressure on CNY forward points as well, more so if onshore entities decide to reduce hedges in view of the higher cost from the FX risk reserve requirement.”

“It appears that the Chinese authorities are more concerned about the pace of yuan movement, rather than the level of USD/CNY. We suspect there will be operations to slow/smooth the FX move if that is too rapid, but the aim still seems to be to let the yuan follow market forces.”