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In our recent write on Chinese currency regime, we have already stated that 2016 year-end forecast of USDCNY at 6.85 is firmly upheld. The prospects of a Fed hike before year-end and a rise in capital outflows would likely to drive further Chinese offshore currency depreciation.
We also hold the bias that the PBoC would let further weakness in CNY after the September G20 summit, as a policy reaction to the IMF’s suggestion to allow market forces to guide the exchange rate and move more towards a floating FX regime.
For now, we maintain our bearish view on Chinese offshore currency and advocate buying CNH crosses on dips as the CNH could underperform again after the current period of consolidation.
We would be more productive on the CNH if Chinese exports recover and are further, coupled with progress in China’s economic restructuring.
FX volatility, which has come-off in this phase of consolidation, could rebound – especially if markets start to react to developments in the US presidential election. We advise corporates with exposure to CNH crosses to hedge.
Among the crosses, we see upside risk in JPYCNH and NZDCNH. The current level of NZDCNH offers an attractive entry level to go long in the pair (Spot 4.8020, Target 5.20, Stop-loss 4.72).
Despite the current CNH consolidation, CNH crosses that have been tracked (EURCNH, JPYCNH, AUDCNH, NZDCNH, SGDCNH, and TWDCNH) have remained in a broad up-channel. The channel provides a useful guide to pick the levels to buy and sell the crosses. Overall, our bias is to buy the crosses on dips, with the main exception being EURCNH.
