The dollar could continue to weaken if China strengthens – analyst
Barclays analysts suggest that the U.S. dollar may weaken further if China's fiscal stimulus expands to a CN¥10T package. They believe the initial CN¥2T stimulus aims for economic stabilization, reducing risks for the yuan. Kaanhari Singh notes that a strong Chinese stimulus could enhance the yuan's value and create depreciation pressures on the dollar, especially if the U.S. Federal Reserve underdelivers on rate cuts. The yuan has already strengthened against the dollar, raising the risk of USD/CNY dropping below 7.00.
Barclays analysts said there is potential for continued dollar weakness if China’s fiscal stimulus becomes a CN¥10T package.
Barclays analysts believe that the initial announcement of the China’s CN¥2T fiscal stimulus will lean more towards economic stabilization than towards expansion, reducing some of the downside risks for the yuan.
“Yet, if this is the precursor to a CN¥10T package, or if it at least signals increasingly sensitivity towards boosting Chinese consumption and domestic demand, then the order of magnitude and the efficacy would dwarf measures seen or announced in recent years,” wrote Kaanhari Singh, head of Asia Cross Asset Strategy at Barclays, in a note.
She said that the risk-reward for the dollar has “likely changed,” and that her base case is that the U.S. Federal Reserve underdelivers rate cuts vs. what is priced in the market.
“And in a world where China boosts external growth, the likelihood of that outcome increases.”
She believes there is a big chance for economic rebounds in China, Asia, commodity producers, and for Europe, which could create a dollar alternative, “even tactically.”
This could cause the dollar to experience depreciation pressures not seen before, she said.
“A strong China stimulus would clearly be beneficial for the Chinese yuan via equity correlations,” Singh said.
She added that the Chinese economic news has improved sentiment for the currency, with the Chinese yuan strengthening against the U.S. dollar (CNY:USD) on a trade-weighted basis.
“The risk that the U.S. dollar/China yuan (USD:CNY) could drop sustainably below 7.00 would increase, potentially breaking below technical support around 6.95 and beyond,” she said. “After the 2022 reopen, it peaked at 6.70, for instance.”