Less dovish Fed guidance may heighten volatility and pressure risk-on currencies
CNY (7.091) ▼
- The yuan strengthened sharply, falling below 7.10/USD for the first time since June 2023, driven by a marked decline in the USD index following Fed Powell's dovish tone post-FOMC. The CNY has also benefited from the narrowing of the 2-year ChinaUS negative yield differential (August average: -239.0 bps; July: -292.0 bps). Market expectations of up to 100 bps in Fed rate cuts this year have pressured US yields, while the prospect of intervention by the PBoC has supported Chinese yields.
- Several factors could influence the yuan's trajectory in September, with US macro conditions and Fed policy decision being paramount. Our base case of a relatively stable US labour market and a 25 bps rate cut by the Fed may bolster the USD, limiting yuan gains. Additionally, China's weak growth could lead to further PBoC easing, dampening appetite for Chinese assets and triggering outflows, which would pressure the yuan. A less dovish Fed, combined with domestic economic challenges, could worsen the outlook for the yuan.
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