US Dollar May Extend its Rally Against the Chinese Yuan in the Third Quarter

US Dollar, Chinese Yuan, USD/CNH – Q3 Top Trade Opportunity

• The US Dollar may rise against the Yuan in Q3
• Global GDP at risk, pressuring Chinese exports
• USD/CNH 7.49 – 7.96 is in focus from model

US Dollar May Continue Higher Against the Chinese Yuan in the Third Quarter

The US Dollar aimed higher against the Chinese Yuan heading into the end of the second quarter of 2023. From my previous top trade opportunity, I continued to update the outlook of USD/CNH based on a multiple regression mode. This forecast is the resumption of the series. From a year-over-year perspective, USD/CNH was up about 7% in the second quarter during the middle of June.

That was compared to a +9% outlook from my Q2 projection. The anticipated push higher in USD/CNH was influenced by expected contractions in Chinese exports. That was the case during the second quarter. In May, Chinese exports unexpectedly shrunk -7.5% y/y compared to a -1.8% y/y median survey. As expected, a slowdown in global growth (as well as expectations) played a key role.

China’s economic reopening offered a boost to the domestic front as retail sales surged. However, the world’s second-largest economy is heavily impacted by the direction of global growth. To get a better idea of why this is important, Chinese Manufacturing PMI clocked in at 48.8 compared to the 49.5 consensus. Values below 50 indicate increasingly contracting activity.

With that in mind, what is the road ahead looking like for the Chinese Yuan? The updated model points to about +8.3% y/y for the exchange rate in the third quarter. Using zones of +- 1 standard deviation, this translates to about a 7.49 – 7.96 USD/CNH rate, up from the Q2 7.08 – 7.52 outlook. Let us look at the drivers for this.

For one thing, Chinese exports are still expected to contract during the third quarter according to estimates from Bloomberg. At the same time, G20 GDP is expected to continue slowing. This comes after surprise interest rate hikes from the Australian and Canadian central banks amid sticky price pressures. Meanwhile, expectations of a pivot from the Federal Reserve have been pushed further out.

Taking all of this into consideration, the US Dollar may continue to push higher against the Chinese Yuan in the third quarter. Central banks are continuing to surprise with rate hikes with few signs of an immediate pivot. That may continue pressuring global growth and thus China’s outward-facing economy, translating into a softer Yuan.

— Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com

To contact Daniel, follow him on Twitter:@ddubrovskyFX