According to analysts from Danske Bank, the CNY is likely to remain stable against the USD in the short term. They see a gradual depreciation in the medium to long term.
Key Quotes:
“Since the turmoil in early January CNY has strengthened slightly against the USD. The fact that the CNH-CNY spread is also back to zero suggests that the big pressure on the currency is fading for now. Most of the hedging and big bets by the hedge funds for a devaluation is done in the offshore market and the CNH-CNY spread is thus a good indicator for the extend of pressure on the yuan.”
“The USD/CNY fixing has also moved gradually lower and actually declined a bit more on Friday than in the previous days. Maybe as a further signal to the markets ahead of the New Year holiday this week, that China means it when it says it doesn’t wish to devalue.”
However, the markets still view the Chinese currency strength through the lens of the USD and hence the weakening of the CNY basket has gotten no attention by the markets.The CNY is also weaker against the EUR with EUR/CNY close to the highs seen in August last year.”
“We expect China to keep the CNY fairly stable against the USD in the short term as it wants a period of stability to keep outflows down. However, in the medium to long term we still look for a gradual depreciation versus the USD. But in a more orderly fashion than what we witnessed in early January.”
(Market News Provided by FXstreet)