Barclays projects that the yuan will consolidate versus the dollar into the summer months as a combination of seasonal headwinds and regional geopolitical uncertainty tempers recent appreciation, the bank said in a research note.
In its analysis, Barclays pointed to familiar seasonal pressures on the currency, including a widening services deficit and the FX demand associated with dividend payouts from Chinese firms listed in Hong Kong. These factors typically exert downward pressure on the yuan during this part of the calendar.
At the same time, the bank noted it had correctly anticipated a number of positive forces that supported the yuan in recent months. Those influences included elevated corporate foreign exchange conversions, firmer yuan fixings set by the People’s Bank of China, and an improvement in risk sentiment toward yuan assets.
With Chinese New Year seasonality now behind markets, Barclays said attention is likely to shift to the pace at which the CFETS basket for the yuan is appreciating. The bank emphasized that a quicker rate of appreciation in that basket would be especially evident if uncertainties in the Middle East diminish and dollar risk premiums narrow. While Barclays sees noteworthy upside for the CFETS basket over the longer term, it stressed that the speed of any advance will be an important consideration for policy and markets.
Barclays also pointed to China’s expanding external surplus as a continuing source of support for the currency, driven by large exporter foreign exchange conversions. However, the bank expects the volume of those conversions to moderate relative to recent peaks.
Assessing vulnerabilities, Barclays’ work indicates the yuan is among the least exposed major currencies to an oil price shock. On policy posture, the bank does not anticipate the People’s Bank of China moving to reverse recent yuan appreciation at this time. Instead, Barclays said the central bank appears to tolerate a gradual stronger trend in the currency so long as the CFETS basket does not register a large rise.
Context note: The bank’s commentary highlights a balance between near-term consolidative forces and longer-term structural support for the yuan, with pace of CFETS basket moves and regional risk sentiment singled out as key monitoring points.