According to Geoff Yu at BNY, the Chinese Yuan (CNY) has emerged as the main outlier among key currencies in the U.S. trade-weighted basket, exhibiting behavior that is the 'complete opposite' of its peers. Notably, the CNY did not react positively to the U.S. Federal Reserve and Treasury decisions in July and August, a divergence attributed to weak domestic growth in China, which has reinforced expectations for further monetary easing [1].
Yu points out that the entire Chinese yield curve, including cash rates, has fallen below Japanese equivalents at various points this year, making it difficult to present a positive case for holding the CNY, despite its spot performance relative to other currencies [1]. He also notes that while the CNY remains a significant currency in global trade, its impact on U.S. trade is diminishing. For instance, Vietnam now holds a larger trade surplus with the U.S. than China, even though many goods are transshipped through Vietnam [1].
Looking ahead, Yu suggests that if Chinese yields begin to rise as reflation is priced in, there could be a further unwinding of underheld CNY positions. However, he expects this process to have a more limited impact on the U.S. dollar compared to historical standards. He advises monitoring China reflation-driven CNY inflows as a key offset to a broader recovery in dollar holdings [1].
CONCLUSION
The Chinese Yuan's unique behavior and lack of positive reaction to recent U.S. policy decisions highlight ongoing concerns about China's domestic growth and yield environment. While further unwinding of CNY positions is possible if yields rise, the impact on the U.S. dollar is expected to be limited. Market participants are advised to watch for signs of reflation-driven CNY inflows as a potential counterbalance.