Surge in CNH seems unsustainable; yuan to depreciate 5 pct against USD this year, says Scotiabank

The CNH surged in the past two sessions on account of two consecutive lower-than-expected USD/CNY fixings, soaring CNH funding costs, a Bloomberg report on the PBoC’s contingency plans and rushed long-dollar position unwinding in the market.

However, the surge is expected not to sustain in the near term prior to U.S. President-elect Donald Trump’s press conference and inauguration set for 11 January and 20 January respectively. the yuan to depreciate about 5% versus the dollar this year as the downward pressure extends into 2017 amid  market worries over potential political and trade conflicts between the U.S. and China, Scotiabank reported.

The PBoC set its daily reference rate at 6.9498 and 6.9526 respectively on Tuesday and Wednesday, much lower than the corresponding estimate of 6.9612 and 6.9605. The move could curb escalating one-way expectation of yuan depreciation, discourage Chinese household from purchasing foreign currency despite an annual reset of the USD 50,000 quota in January and prepare scope for future yuan depreciation in the months ahead.

In addition, USD/CNH spot will trade at a premium to onshore spot most of the time in the coming weeks as current inverted onshore-offshore spot gap will normalize before long.

Further, offshore yuan liquidity conditions are likely to ease somewhat but remain relatively tight ahead of Chinese New Year to deter speculation on the yuan depreciation. Moody’s said yesterday that it will look at negative outlook on China’s sovereign rating this year.

Meanwhile, USD/CNY traded at 6.91, up 0.31 percent, while at 6:00GMT, the FxWirePro's Hourly Yuan Strength Index remained highly bullish at 111.46 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex