USD/CNY: A matter of faith on the Chinese yuan – Rabobank

Analysts at Rabobank explain the reasons to go all in on CNY vs USD. The USD/CNY pair is sitting at 7.077

Key quotes

“China’s PBoC once again reiterated Sunday that it won’t be joining the massive liquidity party. Governor Yi Gang used an editorial to stress he expects the economic shock from Covid to be short and the economy to bounce back.” 

He was also concerned that “too aggressive” macro stimulus would lead to inflation and too much leverage in China’s over-leveraged asset-based economy. So, confidence and prudence. Two items in short supply elsewhere.

“On CNY it’s a matter of faith. If you think that China really has beaten Covid-19 and has also beaten its high household, corporate, and public debt, can beat the local demand shortfall and longer needs to rely on export earnings, or the USD, then dive in.”

“If you believe that China does not have an asset-price valuation problem relative to the rest of the world, then jump; and if you see PBoC prudence will make CNY a store of value as all other currencies inflate their way out, then into the water you go.” 

“You might want to check how deep the pool is first, however, to avoid a broken neck.”