Since July, USDCNH has been on a downward trend, hitting 7.07 at one point—the lowest level since late May 2023, primarily driven by the anticipation of the Fed entering an easing cycle which sparked a broad USD selloff. However, it feels as though we have hit an inflection point regarding the sustainability of the offshore yuan's appreciation, suggesting short-lived relief in USDCNH at these low levels.
Chinese authorities have passively absorbed external tightening to maintain exchange rate stability, aiming for real interest rate convergence between the US and China. Despite the Fed's rate cuts expanding the PBoC's policy room, the recent purchase of 400 billion yuan in special bonds could undermine CNH's strength, indicating that lower bond market rates might not favor yuan appreciation.
China's economy shows signs of slowing despite targeted stimulus measures, with the property sector facing a 27% drop in new home sales and local governments under fiscal strain due to declining land sale revenues. High youth unemployment and weak domestic demand underline the need for further policy easing to reach the 5% GDP growth target.
In the event of an initial yuan appreciation, exporters holding dollars may convert them to yuan, prompting commercial banks to follow suit. This conversion process could lead to passive easing, but the overall forecast tilts towards expecting USDCNH to rise despite momentary strengths in the offshore yuan.
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