USD/CNY likely to reach 7.10 by the end of this year, says Commerzbank

The USD/CNY currency pair is expected to reach a level of 7.10 by the end of this year as overall growth trajectory is seen moderating over the next few quarters.

China’s economy grew 6.9 percent y/y in the first quarter of 2017, one notch higher than market expectations and well above the growth target of 6.5 percent. On a seasonally adjusted basis, the economy expanded by 1.3 percent in the quarter, compared with 1.7 percent in the previous quarter.

Notably, China’s investment accelerated in Q1 while consumption softened. Fixed asset investment grew 9.2 percent y/y in Q1 2017, up from 8.3 percent y/y in 2016. Retail sales slowed to 10.0 perrcent in the first quarter of 2017, compared with a 10.4 percent gain throughout 2016. As investment accelerated, industrial production also sped up to 6.8 percent y/y in Q1 2017, up from a 6.0 percent growth for 2016.    

However, it is highly unlikely that the country’s investment will remain elevated for a longer time. Also, it appears that the momentum of producer price inflation will continue to be on the upside in the near term.

"Fundamentally speaking, CNY is still under pressure to weaken, given China’s struggling economic rebalancing, rising risks of an asset bubble and the poor return of CNY-denominated assets. We, therefore, think CNY will weaken by another 3 percent over the remainder of 2017, and USD-CNY will reach 7.10 by the end of this year," Commerzbank commented in its latest research report.