Chinese Yuan: Measured RMB appreciation with two-way risks – OCBC

OCBC Bank strategists Sim Moh Siong and Christopher Wong have noted that the USD/CNH exchange rate has been on the rise, aligning with a broader recovery in the US Dollar (USD) and increasing US Treasury yields. The People's Bank of China (PBoC) continues to favor a gradual appreciation of the Renminbi (RMB). While a mild bearish trend remains in place, a modest rebound cannot be entirely dismissed, with resistance levels at 6.7410-6.75 and support at 6.72-6.70.

Geopolitical concerns surrounding Iran's oil and potential secondary sanctions may contribute to increased RMB volatility.

USD/CNH rose alongside the strengthened USD and higher US Treasury yields, though the movement has been relatively limited. China's significant role as a purchaser of Iranian oil adds another layer of uncertainty due to increased US pressure on Iran. The USD/CNH rate was last observed at 6.7225 levels. A mild bearish momentum is still evident on the daily chart, though technical indicators suggest a tentative shift towards a potential modest rebound from oversold conditions. Support is expected at 6.72 and 6.70, while resistance is anticipated at 6.7410 and 6.75.

The immediate impact on FX markets should remain limited, provided that any sanctions remain indirect and do not directly target major Chinese financial institutions. However, the escalation of secondary sanctions against Chinese firms or banks could introduce more two-way volatility. The PBoC has indicated a preference for a measured pace of RMB appreciation, as evidenced by the significant gap between the fix and expectation rates. Policymakers remain cautious about allowing RMB strength to rise too quickly.