USD/CNH trading conservatively post US-China deal signing

The USD/CNH is trading mixed, and is expected to continue doing so in the short run, following the signing of the phase one trade deal between US and China.

That’s because expectations have already been priced in, said IG Asia Market Strategist Pan Jingyi.

However, she said that does not negate the fact that the pair ‘had been particularly sensitive toward the latest phase-one trade deal formulation’. Alongside the stabilisation of economic data, prices had trended downward throughout Q4 2019 and into the start of the new year past 6.90.

Now all eyes are turned toward China’s retail sales and industrial production figures for December 2019 (announced together with Q4 GDP on Friday morning), which Pan says could produce a clearer trading pattern.

‘The expectations are for slight declines on year-on-year growth from November's reading for both. With signs of stabilisation, any surprise here would help to see the yuan strengthen,’ she said.

Yuan’s ‘currency manipulator’ label removed

Still, at the current level of 6.8838, the USD/CNH is already showing some growth signs, trading 0.24% above Tuesday’s low.

Earlier this week, the forex pair dipped as much as 0.71%, after the US Treasury removed the ‘currency manipulator’ label that it had placed on China last August, which some observers believe was an act of goodwill ahead of the signing. The offshore yuan had rallied to a five-month high (pre-label levels) against the greenback.

Long-term outlook

Taking all these these factors into consideration, the market’s long-term outlook for the USD/CNH is a conservative one.

Wang Tao, head of Asia economics and chief China economist at UBS, predicts that the USD/CNH will appreciate to 7.0 by the end of the year.

‘There will be times when it moves lower than 7.0, where it strengthens. Our view is that after the phase one deal, there’s still the US election and other uncertainties that might flare up, so the exchange rate will move a little bit,’ she told Bloomberg TV.

Pan shares a similar sentiment. ‘This level (6.90) may serve as a near-term resistance for prices and a bullish scenario could potentially see prices back to the early 2019 lows of around 6.70, unless things flare up again, if we do get expectations of further tariffs rollbacks down the road,’ she said.