Skip to Content
News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site. See our updated Privacy Policy here.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
Subscribe
Please try again
More View More
Top 2023 Trade: USD May Pressure CNH in Q1, Eyes on Global Growth

Top 2023 Trade: USD May Pressure CNH in Q1, Eyes on Global Growth

Daniel Dubrovsky, Contributor
Top Trading Opportunities in Q1
Top Trading Opportunities in Q1
Recommended by Daniel Dubrovsky
Get Your Free Top Trading Opportunities Forecast
Get My Guide

The US Dollar weakened against the Chinese Yuan in the fourth quarter of 2022, with USD/CNH falling about 2.2% as we approached the middle of December. At one point, the pair was up as much as 3.3% before a turn lower occurred. As such, the overall performance was a mixed bag. Bullish USD/CNH was my top trading opportunity for Q4, does this outlook hold heading into 2023?

USD/CNH’s turn lower was triggered by improving risk appetite as equities trimmed losses. Markets began pricing in a less-hawkish Federal Reserve as inflation began cooling slightly. Treasury yields softened and Wall Street pushed higher. That dampened demand for the haven-linked US Dollar. But, fundamental risks for the Chinese Yuan remain.

China is an outward-facing economy, making it sensitive to swings in global growth. The most aggressive tightening in decades to combat high inflation will likely continue taking its toll. This is especially the case after the European Central Bank delivered a more aggressive policy announcement in December. With that in mind, the focus for USD/CNH may remain on the upside.

In the fourth quarter top trading opportunity, I used a multiple linear regression model to predict the Chinese Yuan. The same one was used again, using variables like Chinese exports, CPI, retail sales, G20 GDP and the spread between Chinese and US 10-year Treasury yields to gauge their impact on the exchange rate.

Then, economists’ estimates for these variables in the coming quarters were plugged into the model to see where things could go. The model sees a -10.9% y/y projection for CNH/USD in the first quarter of 2023. That translates into USD/CNH around 7.149.

Now, let us add some wiggle room. A look at the model projections since 2011 shows that outcomes closely follow a normal distribution or bell-shaped curve. If we assume that future projections will also be normally distributed, we can apply the empirical rule to create a zone of +- 1 standard deviations from the projections.

For the first quarter, that leaves a range of (6.891 – 7.416). Things are anticipated to get worse for the Yuan heading into the second quarter of 2023. A projected 9.2% y/y decline in Q2 would leave USD/CNH around 7.395 with a wiggle room roughly (6.979 – 7.671). It seems more pain might be ahead for the Chinese Yuan.

Chinese Yuan Remains Vulnerable Going Into 2023

image1.png

Data Source: Bloomberg, Chart and Model Created by Daniel Dubrovsky

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

DISCLOSURES