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.
BNY analyst Geoff Yu notes that the Chinese Yuan (CNY) is the primary outlier in the U.S. trade-weighted currency basket, behaving in contrast to other major currencies. Despite the Federal Reserve and Treasury's decisions in July and August, CNY did not react positively. Weakening domestic growth in China further contributed to expectations of easing.
Should Chinese yields rise due to anticipated reflation, there could be additional unwinding of CNY positions, though the impact on the U.S. dollar would likely be minimal. China's yield curve, including cash rates, has fallen below Japanese rates at multiple points this year, making a compelling case for holding the currency difficult.
Although CNY plays a significant role in global trade, its influence on U.S. trade is waning. In fact, Vietnam now boasts a larger trade surplus with the U.S. compared to China, even though many of the goods are transshipments. If Chinese yields were to rise as reflation expectations materialize, further CNY position unwinding could occur, affecting the dollar less severely historically.
Investors should keep an eye on China's reflation-driven CNY inflows as a key counterbalance to a potential broader recovery in dollar holdings.
Written by urgent.news from FXStreet's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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