Since the beginning of November, the onshore CNY and offshore CNH have strengthened by around 3.5% versus USD. Both are now trading at pivotal levels close to their 200 day moving averages. Their appreciation cannot be solely attributed to USD weakness, with the CNY CFETS trade weighted index appreciating by around 1.8% over same period. In other words China’s currency has outperformed many of its trading partners.
The relative strength of the CNY may be an effort by China to placate the US authorities ahead of trade talks. Indeed according to my estimate China has been selling USDCNY over the last few months, albeit not in large amounts. Interestingly China has not used the counter cyclical factor to push CNY lower as fixings have been stronger than market estimates only around 50% of the time over the last 3 months.
Much of the strengthening in the CNY move came after the US administration announced a pause in the trade war at the start of December, with a delay in the planned increase in tariffs from 10% to 25% on around half of Chinese exports to the US. The implication is that China does not want to antagonise the US administration with CNY weakness, despite the fact that recent Chinese trade numbers have been awful.
China had given itself some room to allow CNY appreciation by previously letting the currency fall by around 5.8% in trade weighted terms (from around 19 June 18 to end July 18) in the wake of the imposition of US tariffs. Its appreciation over recent weeks looks modest set against this background. As such CNY is likely to maintain a firm tone around the trade talks this week.