USD/CNY: A move to 7.00 is possible but a precipitous drop by 20% is unlikely to be on the cards – Commerzbank

USD/CNY is seemingly gunning for the psychological 7.00 level. In the view of economists at Commerzbank, the People’s Bank of China (PBoC) may not welcome such a move.

PBoC likely to keep a closer eye on CNY’s weakness

“The question on some people’s minds is whether it’ll catapult a lot higher once it breaches 7.00 e.g as per USD/JPY when it got above 140? Despite similar drivers such as a widening interest rate differential with USD rates and a strong USD, PBoC may not welcome such a move as it will exacerbate an already challenging macro backdrop.”

“A move to 7.00 is possible but a precipitous drop by 20% as per JPY vs USD so far this year is unlikely to be on the cards. A sharp CNY drop will raise concerns over capital outflows despite China’s closed capital account.”

“PBoC is likely to keep a closer eye on CNY’s weakness, particularly the pace of depreciation, than the Bank of Japan. It also has the daily fix mechanism as an anchor for CNY.”