Thoughts on the Chinese currency from MS:
- In the near term, we think the PBoC will likely work to keep the RMB stable on a TWI basis via adjustments to the USDCNY fixing. A stronger RMB will act as an 'anti-USD' and will help bring about a secular decline in the DXY.
- However, over the course of 2019, we see a case for RMB underperformance relative to EM due to widening of China's current account deficit and we suggest investors buy SGD/CNH to capitalise on this trend.
MS add more on trade tensions :
- our economists have pencilled in a base case of 25% tariffs on US$200bn imports of Chinese goods into the US.
- Should tariffs be applied on all Chinese imports, this would exceed our current base case and could increase downside risks to growth.
- However, more tariffs only pushes up inflation, weighing on corporate profitability and the US asset and hence USD outlook further.
And, on yuan in the short term:
- Options pricing from one-week USDCNY risk reversals suggests, on average, the market remains optimistic that a trade deal could be reached, resulting in a CNY rally.
