Less pressure on the Yuan – Commerzbank

The yuan going to trade in the next couple of quarters a bit stronger than in the forecast made in August. But this is only because we now expect a dollar that is slightly weaker than in our previous forecast. The USD/CNY to remain above the 7 mark to reflect our view that the yuan will stay on the weak side before China’s economic fundamentals could improve visibly, Commerzbank’s FX strategist Tommy Wu notes.

USD/CNY to stay at around 7.05 in H1 2025

“The yuan strengthened against the USD in August and September along with other Asian currencies, as the markets repriced Fed rate cut expectations and US Treasury yields fell across the curve. The negative China-US yield spreads narrowed and alleviated pressures on the yuan. USD/CNY fell from as high as above 7.27 in July to 7.05 in mid-September.”

“We have revised our USD/CNY forecast lower for the next two quarters compared to our forecast in August. This reflects the recent strengthening of the yuan against the USD, and also our new USD forecast. We now expect a USD path that is slightly below the one in August because of the bigger initial rate cut by the Fed, plus we now expect one additional rate cut next year which brings the terminal rate to 3.5% by Q2 2025 instead of 4% previously.”

“Weak economic fundamentals in China will also continue to weigh on the yuan. In all, we expect USD/CNY to stay at around 7.05 in H1 2025. We expect the US growth advantage will return in H2 2025 following a soft patch, and the Fed will stop cutting rates by then. The markets will then adjust their expectations on Fed rate cuts and the dollar will likely strengthen for USD/CNY to rise back to 7.10.”