Revising USD/CNY lower to 7.05 by year end

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• CNY’s recent strengthening against the dollar was largely driven by external factors, including 1) a weakening US dollar; 2) a narrower yield spread between China and US; 3) unwind of CNY carry trade.
• These three factors likely continue to drive USD/CNY in the rest of this year and next. While recent labour data stirred up recession concerns over US economy, the strong July retail sales and positive wealth effect for households suggest a possible growth deceleration, rather than an outright recession ahead. This “soft-landing” scenario of US economy bodes well with Fed’s policy rate normalization and a trend decline of the US dollar in medium term. And we expect the negative 10y government bonds yield spread between China and US to further narrow by one third during next 12 month period, easing depreciation pressure on CNY.
• The fact that CNY only appreciated 1.4% against the dollar this month, amid the dollar’s 2.4% depreciation, indicates that China’s domestic factors dragged on the currency. July key macroeconomic indicators showed that the downward pressure in Q2 persisted into July, and in both sequential and year-over-year terms, major indicators of property sector were in large contraction. July was another month with weak domestic demand.
• Recently, government agencies have been rolling out measures to support the economy, including the RMB 300bn equipment upgrade and consumer goods trade-in program, PBoC’s plan to support the development of housing rental industry to help housing destocking, and the five-year action plan on deepening the people-centered new urbanization strategy laid out by the State council and etc. However, to successfully reverse the current decelerating (and weak) growth momentum, more fiscal policy support is needed.
• We lower our GDP growth forecast for 2024 to 4.8% from previous 5.0%, and keep 4.8% for 2025 unchanged.
• China’s domestic economic development would limit CNY’s strength in near term, before providing support for the currency in medium term as the economy stabilizes and moderately accelerates. We expect USD/CNY in a range around 7.15 in September, and to reach 7.05 by the end of 2024, 7.00 by Q1 2025, and 6.95 by Q2 2025.