Chinese economic growth to moderate further in 2019, USD/CNY likely to trade towards 6.95 by end-2019

Chinese economy ended 2018 at a weak growth pace. Given the subdued domestic consumption and trade friction the economy expanded at the slowest rate since the global financial crisis. The Chinese economic outlook continues to be challenging and the authorities have stepped up attempts to boost growth, noted Commerzbank in a research report. The growth is expected to further moderate in 2019 and a gradual depreciation of Chinese yuan is justified because of deepening growth challenges, monetary policy accommodation and a contracting current account surplus.

Some till will be needed to see if the measures undertaken by the authorities can steady the Chinese economy. Nevertheless, the CNY exchange rates have strengthened a bit since December because of hopes for a trade deal and aggressive support measures that aid in rebounding market sentiment. While the USD/CNY pair is unlikely to hike above 7.00 any time soon, there is not constructive view on the Chinese yuan either said Commerzbank.

The Chinese economy continues to be fundamentally weak because of the high debt levels. BIS compiled data that imply that the debt to non-financial corporates has picked up again since early 2018, and this trend is expected to continue as the deleveraging campaign has been delayed. Secondly, the easing policies might lead to a smaller current account surplus or even occasional deficit in the years ahead as domestic demand is likely to spur imports. China’s trade surplus might narrow furthermore if a trade deal with the U.S. could be reached.

China’s trade surplus with the U.S. accounted for over 90 percent of its total trade surplus in 2018, suggesting that a trade deal will be CNY negative from a medium to long term perspective in spite of attempts of the U.S. side to avert China from actively weakening CNY to underpin the export sector.

“All told, we see China’s growth to moderate to 6.3 percent y/y for 2019, and think that a gradual deprecation of CNY is justified due to intensifying growth challenges, monetary easing measures and a shrinking trade surplus. We forecast USD-CNY to climb towards 6.95 by the end of this year”, added Commerzbank.

At 12:00 GMT the FxWirePro's Hourly Strength Index of Chinese Yuan was neutral at -22.4659, while the FxWirePro's Hourly Strength Index of US Dollar was highly bullish at 111.136 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex