Forex Investment and Currency Trading

Despite the rebound and stabilization of USD earlier in the year, the CNY has strengthened ahead of the fourth round of US China Strategic Economic Dialogue (SED). In the last week, the USD/CNY fell 0.38%. Meanwhile, the market is building a deeper expectation of a more rapid CNY appreciation. The spread between 1Y USD/CNY NDF and spot rate fell to -415bps on June 17 from its most narrow reading in the last week of 278bps. The view is, CNY’s strength will likely continue as the May economic releases reinforce the need for more monetary tightening. Despite the expected slower May CPI growth (7.7% yoy from 8.5% in April) led by lower food inflation (19.9% yoy vs. 22.1% in April), inflationary pressures remain firm. The higher PPI (8.2% in May vs. 8.1% in April) and its pass-though will likely constrain the pace of inflation slowdown and still underpin the prospect of headline CPI growth overshooting 4.8% official annual target. In addition, the May trade surplus widened to $20.2 billion from $16.67 billion in April on an upside surprise to both export and import growth. Exports growth (28.1% yoy vs. 21.9% in April) has maintained resilience due to a strong growth of electronic and machinery product exports (up 26.1% yoy, accounting for 58.8% of total exports in the first five months). Faster than expected import growth (40% yoy vs.26.4% in April) was mainly due to higher raw material and energy import prices, which further highlight the need for CNY appreciation to curb imported inflation. Therefore market expects more monetary tightening through out the year and a stronger CNY 6.65 at the year end.

Persistent inflationary pressure and monetary tightening support a stronger CNY