Less pressure on the yuan – Commerzbank

The yuan will trade in the next two quarters slightly stronger than in the forecast made in August. But that’s because we now expect a dollar that’s a bit weaker than in our previous forecast. USD/CNY will remain above 7 to reflect our view that the yuan will remain on the weak side before China’s economic fundamentals improve noticeably, notes Tommy Wu, FX strategist at Commerzbank.

USD/CNY will remain at around 7.05 in the first half of 2025

“The yuan strengthened against the USD in August and September, along with other Asian currencies, as markets repriced expectations of a Fed rate cut and US Treasury yields fell along the curve. Negative China-US yield margins narrowed and eased pressures on the yuan. USD/CNY fell from over 7.27 in July to 7.05 in mid-September.

“We have revised our USD/CNY forecast lower for the next two quarters compared to our August forecast. This reflects the recent strengthening of the yuan against the USD as well as our new USD forecast. We now expect a USD trajectory that is slightly below that of August due to the Fed’s larger initial rate cut, plus we now expect a further rate cut next year, bringing the terminal rate to 3.5% by Q2 2025 instead of 4% previously.”

“Weak economic fundamentals in China will also continue to weigh on the yuan. Overall, we expect USD/CNY to remain around 7.05 in the first half of 2025. We expect the US growth advantage to return in the second half of 2025 after a weak patch and the Fed will wind down to reduce rates until then. Markets will then adjust their expectations of Fed rate cuts and the dollar is likely to strengthen for USD/CNY to return to 7.10.”