CNY: It’s not just about a strong US Dollar – Commerzbank

At the end of last week, USD/CNY broke above 7.30, which previously had been successfully defended in the last days of 2024. Yesterday, the exchange rate even rose to almost 7.33 before falling again in the wake of various reports about the impending US tariffs. In addition to the strong US dollar, however, the Chinese side of the exchange rate is also playing a decisive role. At least the interest rate market is still not convinced that the economic situation will change anytime soon. The current interest rate on 10-year government bonds fell further during recent weeks to 1.58%, while interest rates on 2-year government bonds even fell below 1% briefly on Monday. The market is therefore expecting further significant easing measures from the central bank and persistently low interest rates in China, Commerzbank’s FX analyst Volkmar Baur notes.

Low-interest rate level is likely here to weigh on the CNY

“And the purchasing managers' indices published at the beginning of the year did little to alleviate these concerns. Although they did include a few rays of hope, such as the increase in services and construction. However, the manufacturing sector weakened again in response. Moreover, the details once again revealed long-standing weaknesses. For example, the employment component of the PMIs clearly shows that the labour market is still not running smoothly and will continue to weigh on domestic demand.”

“And other surveys also point to the ongoing plight in the labour market. According to the central bank survey, employee perceived labour market prospects have continued to deteriorate in recent quarters and are well below pre-pandemic levels. And the National Bureau of Statistics recently published a survey of companies in the so-called ‘new economy’ according to which starting salaries were around 8% below the previous year's level. According to this survey, the decline in starting salaries accelerated significantly, particularly in the second half of the year. It is therefore no wonder that in the above-mentioned central bank survey, only a very small proportion of those surveyed currently consider it a good time to make a major purchase.”

“The inflation figures for December will be published on Thursday. The consensus, according to Bloomberg, expects consumer prices to rise by just 0.1% compared to last December, while producer prices are expected to fall by 2.4% year-on-year. In view of the labour market, the resulting weak domestic demand and the lack of price pressure from the supply side, it is difficult to imagine how inflation could increase significantly and sustainably. The low-interest rate level is therefore likely here to stay and will continue to weigh on the CNY.”