UBS Forecasts Upside Risk for USD/CNY Exchange Rate

UBS analysts have predicted an upside risk for the USD/CNY exchange rate in the near term, anticipating a potential adjustment by the People’s Bank of China (PBoC) to the daily USD/CNY fixings. This adjustment would likely be made in response to the strength of the US dollar since the beginning of 2024.

Despite a 4.6% increase in the US dollar index this year, the PBoC has maintained the USD/CNY rate around the 7.10 mark to ensure currency stability. However, UBS believes that the yuan’s relative strength against other major currencies, facilitated by the stable fixings, may hinder China’s economic growth and anti-disinflation efforts.

UBS suggests that current US-China yield differentials, which have been widening, indicate that the USD/CNY should be trading closer to the 7.35–7.40 range. Additionally, while a potential US Federal Reserve rate-cutting cycle starting in September could lead to a downward trend for USDCNY, concerns over US-China trade tensions ahead of the US presidential elections in November may temper this decline.

The firm recommends investors consider going long on USD/CNY, proposing a trade with a target of 7.35 and a stop-loss at 7.15. This strategy is expected to yield a positive carry of around 2.3% per annum.

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