Fundamental Forecast for CNH: Bullish
The offshore Chinese Yuan (CNH) closed at a one-and-half year high level against the U.S. Dollar on Friday; this is also the fourth consecutive week that the Yuan advanced against its U.S. counterpart. Compared to other G10 currencies, the Yuan ranked in the middle, beating Yen, Pound, Swiss Franc and Euro. Looking forward, Chinese regulators’ recent policy moves could enlarge Yuan’s gains. Also, French President Emmanuel Macron will pay his first official visit to China next week. In addition, a heavy Chinese calendar, dotted with foreign reserves, inflation, money supply and trade gauges, could elevate volatility in Yuan rates as well.
Chinese regulators have further tightened oversight on cross-border transactions. On December 30, 2017, SAFE, the FX regulator announced to set daily and annually limits on individuals’ overseas withdrawals using Chinese bank cards. This is a strengthened rule compared to the measure launched a year ago, which only required banks to report cross-border transactions with a mount above certain levels. On January 7, China will release December foreign reserves print, a measure that could impact regulators’ tolerance of capital flows. The gauge is expected to increase for the eleventh straight month, to $3.127 trillion; yet, even if this is the case, the print is still distant from its peak level of nearly $4 trillion in the middle of 2014.
At the same time, regulators continued to promote the use of the Yuan as a currency of settlement. Last October, Yuan slipped to the seventh most used currency in global payments; it regained the sixth position in November, but still inferior to its best record of ranking the fourth two years ago. On January 5, China’s Central Bank launched guidelines to further promote Yuan settlement. From regulators’ perspective, a relative stable or an even strong Yuan (when the Dollar is weak) could help achieve the above goals.
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