Yuan to remain weak in near term before positive sentiment towards China can be established – MUFG

Economists at MUFG Bank expect the Chinese Yuan to remain under downside pressure in the near term. However, CNY is set to recover in the medium term.

USD/CNY to drop back to the 6.8000 level by the end of this year

On the expectation of diverging monetary policy between the Fed and PBOC in the near term, with further rate cuts from the PBOC over in the coming months amid the market’s expectation of another 25 bps hike from the Fed, this potential widening of negative yield spreads with the US could continue to place downward pressure on the CNY in the near term. Yet once more measurable and concrete stimulus policies are rolled out, we expect CNY to rebound against the Dollar. 

Should China eventually realize a growth rate of 5.5% for 2023, a marginal improvement in the yield spread, better relative GDP growth rate, and improving sentiment will be the factors in driving CNY’s appreciation in the medium term.

We expect USD/CNY to drop back to the 6.8000 level by the end of this year.