US Dollar, Chinese Yuan and USD/CNH – The highest trading opportunity in the third quarter
- the U.S. dollar It may rise against the yuan in Q3
- worldwide gross domestic product At risk, putting pressure on Chinese exports
- US dollar / Chinese yuan 7.49 – 7.96 is the focus of the model
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The US dollar may continue to strengthen against the Chinese yuan in the third quarter
The USD target was bullish against the Chinese Yuan heading towards the end of Q2 2023. From my previous biggest trading opportunity, I kept updating the USD/CNH forecast based on the multiple regression mode. This forecast is a resume for the series. From a year-over-year perspective, USD/CNH is up about 7% in the second quarter through mid-June.
That compared to +9% of my forecast for the second quarter. The expected rally in the USD/CNH pair was affected by expected contractions in Chinese exports. This was the case during the second quarter. In May, Chinese exports unexpectedly contracted -7.5% yoy compared to a survey average of -1.8% yoy. As expected, the slowdown in global growth (as well as the outlook) played a major role.
China’s economic reopening provided a boost to the domestic front as retail sales rose. However, the second largest economy in the world is highly affected by the global growth trend. To get a better idea of why this matters, the China Manufacturing PMI came in at 48.8 compared to the consensus of 49.5. Values below 50 indicate increased contracting activity.
With that in mind, what does the path for the Chinese Yuan look like? The updated model suggests around +8.3% yoy for the exchange rate in Q3. Using areas of +- 1 standard deviation, this translates to around $7.49 – $7.96/CNH rate, up from the Q2 forecast of 7.08 – 7.52. Let’s take a look at the motives for this.
For one thing, Chinese exports are still expected to contract during the third quarter, according to Bloomberg estimates. At the same time, the G20 GDP is expected to continue to slow. This follows sudden interest rate increases by the Australian and Canadian central banks amid viscous price pressures. Meanwhile, expectations for a fulcrum from the Fed have been pushed even further.
With all this in mind, the US dollar may continue to appreciate against the Chinese yuan in the third quarter. Central banks continue to surprise with rate hikes with little sign of an immediate pivot. This may continue to put pressure on global growth and thus the outward-facing Chinese economy, leading to a weaker yuan.
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Find out what our analysts expect in the third quarter relative to the dollar
– By Daniel Dubrovsky, Chief Strategist for DailyFX.com
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