Fundamental Forecast for the Yuan:Â Neutral
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Both the onshore and offshore Yuan rates failed to hold above the key resistance level 6.70, falling below the 6.6800-handle this week. On Tuesday, the spread between the two rates widened to 142 pips after the PBOC guided the USD/CNY stronger-than-expected. Over the following three days, the PBOC continued to strengthen the Yuan fix by +302 pips or +0.45%, to 6.6669 on Friday. The spread between the onshore and offshore Yuan rates narrowed following the guidance to 18 pips on Friday. Next week, event risk that may directly affect Dollar/Yuan pairs include the FOMC rate decision, the US 2Q GDP print and G-20 meetings. The Bank of Japan’s rate decision, UK and Euro-zone 2Q GDP reads will likely bring considerable volatility to the Yuan Index and thus indirectly affect Dollar/Yuan pairs. In addition to market moves, the PBOC’s guidance will likely continue to weigh the Yuan. The Central Bank is likely to hold the Chinese currency within a range in the coming week.
Major central banks’ monetary policy adds uncertainties to the FX market. Their decisions next week may either move Dollar/Yuan pairs directly; or drive the Yuan Index composed of multiple cross-pairs and, in-turn, the Dollar/Yuan as the PBOC may want to even-out changes in the Yuan Index. The odds of a Fed rate hike in July is very low, only 8% according to Fed Funds Futures a week ahead of the decision; but the outlook of Fed’s monetary policy over the following periods may bring elevated volatility to Dollar/Yuan pairs. Also, the US will release the second quarter GDP on Friday, just two days after the FOMC decision. The IMF July World Economic Outlook report said that despite the US weakness in the first quarter, leading indicators have signaled a pick up in the second quarter. A stronger-than-expected GDP read or a more hawkish tone from Fed could send the US Dollar higher and in-turn, drag down Yuan rates.
