US Dollar Set to Extend Gains Against Chinese Yuan in Q3 2023

Key Insights

• US Dollar is expected to continue strengthening against the Chinese Yuan in Q3 2023.
• Chinese export contractions and global growth slowdown contribute to the anticipated USD/CNH appreciation.
• The updated model projects a 8.3% year-on-year increase in the exchange rate, with an expected USD/CNH rate range of 7.49 to 7.96.

As we head into the third quarter of 2023, the US Dollar appears poised to strengthen further against the Chinese Yuan.

In this analysis, we will delve into the factors influencing this outlook, building on the previous trade opportunity and leveraging a multiple regression model.

Throughout the second quarter, the USD/CNH pair demonstrated an upward trajectory, gaining approximately 7% by mid-June compared to the anticipated 9% projected earlier.

Influence of Chinese Export Contractions

The expected upward movement in USD/CNH was largely driven by the contraction in Chinese exports witnessed during the second quarter.

In May, Chinese exports unexpectedly shrunk by 7.5% year-on-year, surpassing the median survey projection of -1.8% year-on-year.

This decline can be attributed to the global economic slowdown, which impacted both the Chinese economy and market expectations.

Role of Global Growth and Chinese Manufacturing PMI

China’s economic reopening provided a domestic boost, reflected in surging retail sales. However, the country’s economy is highly dependent on global growth trends.

Notably, the Chinese Manufacturing PMI recorded a value of 48.8, below the consensus of 49.5, indicating contracting activity.

Values below 50 signify a further contraction, underscoring the significance of global growth for China’s outward-facing economy.

Outlook for the Chinese Yuan in Q3

Based on the updated model, the exchange rate for the Chinese Yuan is projected to increase by approximately 8.3% year-on-year in the third quarter.

Utilizing zones of ±1 standard deviation, this translates to an expected USD/CNH rate ranging between 7.49 and 7.96, representing an upward revision from the Q2 outlook of 7.08 to 7.52.

Now, let’s examine the key drivers supporting this forecast.

Continued Contractions in Chinese Exports and Slowing G20 GDP

Estimates from Bloomberg suggest that Chinese exports will likely continue to contract during the third quarter.

Additionally, G20 GDP is expected to experience further deceleration. This outlook aligns with recent surprise interest rate hikes by the Australian and Canadian central banks, implemented to address persistent inflationary pressures. Moreover, expectations of a Federal Reserve policy pivot have been postponed, maintaining a higher likelihood of additional rate hikes.

Considering these factors, it is probable that the US Dollar will maintain its upward momentum against the Chinese Yuan in the third quarter.

The persistent rate hikes by central banks, coupled with a lack of immediate policy pivots, may exert continued pressure on global growth and consequently impact China’s outward-facing economy. As a result, the Chinese Yuan may experience a softer performance relative to the US Dollar.

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