Renminbi unlikely to revisit last year’s lows

The renminbi strengthened sharply against the US dollar in response to China’s move away from zero-COVID. But the currency has since reversed much of those gains and is now approaching 7.10/$, its weakest level since December. Optimism over China’s reopening recovery and foreign capital flows into the country have given way to pessimism and renewed outflows. Yield differentials have also moved against the renminbi recently, amid stubbornly high core inflation in the US and growing expectations for monetary easing in China. We doubt this depreciation pressure will persist, however. Investors have turned overly pessimistic on China’s reopening recovery, which still has some way to go in our view. And while we expect further monetary easing from the People’s Bank, this is likely to be more modest than what is currently priced into markets. At the same time, we think US yields will drop back before long as the US economy slips into a recession and inflation comes down sharply. On our forecasts, the China-US yield spread will soon be back at levels last seen when the renminbi was trading under 7.0/$. We still expect the currency to end 2023 at around 6.9/$.

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