Chinese Yuan: Appreciation trend outweighs yield gap – Commerzbank

Commerzbank’s Thu Lan Nguyen notes that despite the People’s Bank of China (PBoC) relaxing the cap on US Dollar (USD) deposit rates, the Chinese Yuan has already appreciated about 3% against the Dollar this year. With CNY gains outpacing interest differentials and foreign currency deposits still rising, Nguyen expects the Yuan’s appreciation trend versus the US Dollar to persist in coming months.

PBoC move seen limited for CNY

"The announcement is therefore likely to have little impact. This is also because the current interest rate differential on 1-year time deposits, at around 2.2%, is not significantly lower than the current interest rate differential on 1-year government bonds, which stands at 2.7%. Furthermore, both interest rates are currently lower than the appreciation path the CNY is on against the US dollar."

"If one looks at the 3-month change in the USD-CNY exchange rate and annualizes this figure, one has to go back to May of last year to find an appreciation that is below the interest rate differential. This means: At least in hindsight, from a performance perspective, it has made no sense in recent months to hold US dollars instead of CNY, even though US dollar deposits earned higher interest."

"Since the start of the year, however, the CNY has appreciated by about 3% against the US dollar. Consequently, there is currently little sign of depreciation pressure."

"And yet, foreign currency deposits at Chinese banks have been rising rapidly for months. Since February of last year, corporate foreign currency deposits at Chinese banks have been growing at a double-digit rate year-over-year and most recently reached 602.4 billion USD, the highest level since data collection began in January 2015."

"As mentioned, however, none of this has prevented the CNY from appreciating against the US dollar in recent months. And this trend is likely to continue in the coming months."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)