Forex Comment Jun 29

Yuan shakes off new virus cluster in NE China's Hebei province

Currency moves seen in previous localised outbreaks not replicated during latest flare ups 

by Uwe Parpart
Yuan shakes off new virus cluster in NE China's Hebei province

(ATF) When new virus clusters were discovered and followed up by lockdowns in Northeast China' Heilongjiang province and in Beijing in late May and early June, the Chinese currency took a significant hit each time.

The danger of arrival of a second wave looked large and with it the chances for continued speedy recovery of the economy.

Those fears appear to have been allayed. Both of the earlier outbreak clusters were rapidly contained. Expectations are that the Hebei outbreak near Beijing will be handled expeditiously as well.

This, of course, is in sharp contrast to the massive virus surge to record new highs in the United States.

And as virus surges go, so go currencies. 

The US dollar on the dollar index (DXY) was down 0.2% to 97.2090 at 6pm HK time.

The PBoC set yuan parity this morning at 7.0808, the first day after the Dragon Boat Festival holidays.

By 6pm, the yuan (CNY) traded at 7.0761; the offshore version (CNH) at 7.0728.

Those are not large moves, but they are in sharp contrast to the yuan's downward moves on earlier new outbreaks.

Where do we go from here?

The virus spread in the US and the USD fundamentals all indicate further downward pressure on the greenback – not just against the yuan, but also against the euro as the EU countries are coping much more efficiently with wave-two threats than the US.

For currency strategists, usually it's a look at interest rate differentials that provides for the first take on exchange rates. That still has some validity for the CNY rate. 

But when it comes to the principal US dollar competitors, they all share zero rates with the USD and it's the other fundamentals that count, most notably the current account and net national savings.

From that standpoint, the EUR and the Japanese yen enjoy distinctive advantages against the USD.

Of course, the PBoC sets parity for the yuan with a keen eye on the US dollar's performance and the CNY must stay within a narrow trading range with the dollar. But as the USD experiences continued bouts of weakness, I expect the yuan to move in the direction of the 7.00 - 7.05 range rather than in the direction of the 7.25 mark forecast by some well known investment banks.