As Donald Trump prepares for his inauguration, global financial markets are bracing for potential upheavals. In a recent advisory from UBS, clients are encouraged to adopt a “long” position on the USD/CNY currency pair. With Trump stepping into the presidency, uncertainty looms large, particularly regarding his anticipated policy changes. Analysts from UBS issued a note highlighting the significance of the inauguration, predicting market focus will primarily center on it due to its potential economic ramifications, despite it being a relatively quiet week for major economic data.
The challenge lies in the unpredictable nature of Trump’s initial policies. While immediate drastic measures, such as heavy tariffs, might not materialize right away, the possibility of such actions hangs in the air, influencing market sentiment. UBS notes that the foreign exchange markets are currently not accommodating the potential for substantial tariffs, which could lead to considerable weakening of the Chinese Yuan (CNY). This scenario poses a threat especially to pro-growth currencies like the Euro (EUR), as the ripple effects of trade policies reverberate across borders.
Dan ich Will, a prominent analyst at UBS, emphasized that increased volatility can be expected in the ensuing months. This anticipation stems not only from Trump’s policies but also from diverging economic recovery trajectories between the US and other global economies. Events in the UK and Canada have further compounded uncertainties. Therefore, any adverse developments in the market are expected to heighten both actual and implied volatility across various currency pairs.
The USD/CNY pair has recently hit new highs, trading near the upper limit of the currency fixing range established by Chinese authorities. This upward trend reflects broader market anxiety regarding Trump’s imminent decision-making. UBS forecasts that as Trump’s tariff strategies targeting China become clearer, the Yuan will likely face even more significant pressure, prompting the People’s Bank of China (PBoC) to allow for further depreciation of the currency.
The expectation is that a weaker Yuan may serve as a cushion against the adverse effects of impending tariffs, potentially stabilizing the Chinese economy amid the whirlwind of policy reforms. UBS notes that underlying domestic economic weaknesses may also exacerbate the situation, driven by increasing demand for foreign exchange and capital outflows.
For those looking at trading strategies, UBS suggests a long position on the USD/CNY with eyes set on a move toward 7.50. The strategy seems prudent, especially when factoring in a projected annual carry of 2.1%. Analysts recommend a cautious approach with a stop-loss set at 7.20 to mitigate risks. As markets gear up for the changes in leadership and the subsequent policy shifts, the USD/CNY pair will undoubtedly serve as a bellwether for investor sentiment and economic health not only in China but globally.
As the world anticipates Trump’s presidency, the dynamics of USD/CNY provide a crucial focal point for both traders and policymakers. The course ahead promises to be turbulent, with volatility and uncertainty making strategic trading increasingly vital.