Chinese Yuan: Underheld positions unwind with reflation risks – BNY

Geoff Yu at BNY highlights CNY as the main outlier in the U.S. trade-weighted basket, showing behavior opposite to other key currencies. CNY failed to react positively to July–August Fed and Treasury decisions, with weak domestic growth reinforcing easing expectations. If Chinese yields rise as reflation is priced, further unwinding of underheld CNY positions is possible, with limited impact on USD.

Chinese Yuan flows diverge sharply

"The main outlier is CNY, whose behavior is the complete opposite of the other key currencies in the U.S. trade-weighted basket. CNY didn’t react positively at all to the Fed and Treasury decisions in July and August."

"With the entire Chinese yield curve (including cash rates) falling below Japanese equivalents at various points this year, it’s difficult to make a positive case for currency ownership, even if spot has been performing well relative to peers."

"Although CNY is often the main currency of interest in global trade, its impact on U.S. trade is diminishing. Vietnam now has a larger trade surplus with the U.S. compared to China, even if many of the goods comprise transshipments."

"If yields start to move higher in China as reflation is priced, a further unwinding of underheld CNY positions is possible. The process should be less consequential to the USD by historical standards."

"Meanwhile, monitor China reflation-driven CNY inflows as the clearest offset to a broader dollar holdings recovery."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)