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CNH 1Q Forecast: Vaccines and Biden’s Presidency May Threaten Yuan’s “One Way” Trajectory

CNH 1Q Forecast: Vaccines and Biden’s Presidency May Threaten Yuan’s “One Way” Trajectory

Margaret Yang, CFA, Strategist

CNH 1Q Forecast: Vaccines and Biden’s Presidency May Threaten Yuan’s “One Way” Trajectory

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The offshore Chinese Yuan has strengthened over 7% against the Greenback over the past 12 months, marking it the best-performing Asian currency in 2020. The seemingly “one way” trajectory of USD/CNH was primarily driven by a Dollar weakness as well as the rapid recovery of the Chinese economy from the Covid-19 pandemic. China registered a real GDP growth rate of 4.9% in Q3, outshining global peers.

Emerging market currencies were buoyed by capital inflows this year, as major central banks made a swift shift back to ultra-low interest rates and decisively unleashed liquidity to contain credit risks. A relatively better-handled pandemic situation in the Asia-Pacific region stands in contrast to a second major viral wave that swept most parts of the US and Europe, making a long-Yuan trade appealing for most currency traders.

This narrative may change as the calendar turns to 2021, with the rollout of coronavirus vaccines potentially expediting a recovery in western economies and reining in further monetary stimulus. A potential rebound in the US Dollar as a result of stronger fundamentals and inflation overshoot may lead to a reversal of EM currencies’ bullish trend.

More importantly, a possible reigniting of US-China tensions under Biden’s presidency may threaten the Yuan’s rally, particularly surrounding disputes over technology firms, intellectual property, geopolitical frictions and trade. The Yuan suffered a few rounds of rapid depreciation when President Donald Trump slapped trade tariffs on Chinese imports starting in mid-2018. The currency pair was viewed as a sentiment barometer for the US-China relationship, and will likely continue to play this role into year 2021.

USD/CNH Weekly Chart

USD/CNH Weekly Chart, US-China Trade War, COVID-19 Pandemic

Chart prepared by Margaret Yang, created with IG

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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