USD/CNY broke below the key 7.2 level and made a run for the 7.1 handle amid the carry unwind and volatility surge. Onshore firms and exporters were probably caught offside by this move and likely exacerbated the price action by selling USD/CNY and USD/CNH spot to quickly unwind their carry position, TDS FX and macro strategist Alex Loo notes.

USD/CNY to move towards 7.40 for by year-end

“We reckon there is still more to unwind and this could sustain the CNY rally in the near-term as exporters have likely built up a hefty long USD position – firms haven't been converting their US Dollar (USD) proceeds for some time given the low conversion ratio and settlement balance trends.”

“However, we see a floor for USDCNY at 7.1. We suspect the PBoC will flip its stance soon and allow the CNY to weaken more despite fending off depreciation pressure in recent months. Stronger-than-expected fixing deviation fell sharply today to 136 pips and we could see a return to a period of weaker-than-expected fixings.”

“While a value rotation to Asia low yielders is plausible amid the carry blowup, we doubt investors will pile into CNY longs. Our tracker of composite data trends, surprises and consensus revisions show China still sitting below the US which is bearish the CNY. We still stick to our long USD conviction and an eventual move towards 7.40 for USD/CNY by year-end.”