Chinese Yuan Weakens Against Greenback

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Chinese Yuan Weakens Against Greenback

Chinese Yuan (Cny) Weakens Against Greenback As Yield Difference Widens

Friday's session sent the Chinese Yuan (CNY) lower than its US counterpart. This movement in the USD/CNY increases the yield spread, as the central bank's policies have given rise to policy divergence.

The difference between the 10-year US and the 10-year China's bonds has increased by almost 24 bps. As a result, the yield gap is now 144 bps, which is a big difference & and is already showing its effect on the USD/CNY pair.

If we look at the Chinese side, the bond yield is at a multi-year low, while the US bond yields remain strong & and steady. Against this backdrop, it is only natural for the CNY to weaken against the greenback.

Policy Divergence Continues To Grow

According to Citi's expert, the PBOC and the Fed balance sheets show a significant divergence. This means the offshore Yuan is expected to face more trouble in the next few months.

China is expected to continue with liquidity injections and rate cuts, while the US has yet to move into this phase. Even the odds of rate cuts at March's meeting continue to decrease!

Furthermore, the PBOC injected $48.83 billion worth of loans into the system in December alone! Similar moves are expected as the country is desperately trying to support the housing sector.

Another critical comment Citi's traders shared is that China's exporters still have a lot of USD holdings. So, when these USD holdings are converted into the local currency, the USD will weaken while the CNY will appreciate.

As for when the CNY strength will be materialized, they cited the period between January's end and February's first few days.

When checked last time, the trading price of CNY was near 7.1684 while its opening price was around 7.1675, representing bearish pressure.

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