CNY: Less pressure, but still weak – Commerzbank

We forecast a stronger yuan path than previously expected given our new forecast of a weaker dollar. Nevertheless, we forecast USD/CNY to remain above the 7 mark to reflect our expectation that the yuan will remain weak in the coming quarters, Commerzbank’s FX strategist Tommy Wu notes.

USD/CNY to fall to 7.05 by mid-2025

“The yuan strengthened against the dollar in August along with other Asian currencies, as the markets repriced Fed rate cut expectations and US Treasury yields fell across the curve. The negative China-US yield spreads narrowed and alleviated pressures on the yuan. USD/CNY largely hovered around 7.26-7.28 in most of July and fell to below 7.15 in mid-August.”

“We have revised our USD/CNY forecast lower to reflect a weaker dollar in the medium term than previously expected. This is because we now expect six Fed rate cuts in the coming quarters instead of three at the time of the last forecast, and that the structural US growth advantage will be less pronounced near term.”

Still, we don’t expect the yuan to appreciate significantly because yield differentials between China and the US will likely remain negative, albeit getting narrower or closer to zero in the coming quarters. In all, we expect USD/CNY to fall to 7.05 by mid-2025. As we expect the US growth advantage will return in H2 2025 following a soft patch, and that the Fed will stop cutting rates by then, the USD will likely strengthen for USD/CNY to rise back to 7.10.