CNY: Steady demand from low positioning base – BNY

BNY Strategist Geoff Yu notes a surprising surge in Chinese Yuan demand since the conflict began, with underhedged positions cleared and Chinese assets holding up, especially equities. He expects careful CNY management and gradual portfolio reallocation into Chinese bonds and equities to support the currency, though current foreign holdings remain small versus U.S. assets.

CNY flows improve as positioning normalizes

"One of the most surprising flow patterns we have observed since the conflict began has been a surge in CNY buying that cannot be attributed to hedge unwinding. Hedging levels in the currency are now around 30% below the rolling 1y average, suggesting that underheld positions have been removed."

"At the beginning of the year, we made the case for gradual appreciation of CNY, in addition to valuation adjustments in other high-surplus APAC currencies. In the near term, all such surpluses are at risk from energy bottlenecks, but China is less exposed than peers in North and East Asia."

"Careful official CNY management will also limit realized volatility, which will be viewed favorably in the current environment. Broader APAC appreciation to limit pass-through disinflation is possible, but excess asset positioning in the likes of South Korea and Taiwan is probably necessary first."

"Over the long term, provided greater access and capital market reform continues apace, we expect Chinese assets to attract improved allocations within diversified global portfolios. However, this need not come at the expense of U.S. assets."

"Overseas interest can pick up significantly, further supporting the CNY, but the base is too small to meaningfully affect overall U.S. portfolio allocations."

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