During the beginning of 2023, the dollar is expected to strengthen along with some volatility, which would mean the Chinese Yuan may weaken with large fluctuations, said the UBS strategy team in a note.
“Looking beyond that, while China’s export growth will likely weaken sharply from 2022, import growth may also soften as commodity prices decline and domestic commodity-intensive activities stay weak. As a result, the trade surplus is expected to hold up in 2023,” the analysts wrote in the note.
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They also indicated that given the projected U.S. rate cuts in the second half of 2023, and as China’s reopening and growth recovery continue to take shape, market sentiment is likely to support a Yuan appreciation against the dollar in H2.
“Considering the changing dynamics, we revise our year-end 2022 USD/CNY projection to 7, from our prior forecast of 7.25, and 2023 year-end USD/CNY projection to 6.8, from our prior forecast of 7.1,” they said.
Dollar Weakness: The analysts explained that the dollar index had peaked and started to trend down in November as market expectations of U.S. inflation and Fed rate hikes shifted, while China’s recent steps towards reopening further fuelled Yuan strength.
The Invesco DB US Dollar Index Bullish Fund UUP has lost over 3% in the last month while the WisdomTree Bloomberg US Dollar Bullish Fund USDU shed over 9% in the same period.
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