BofA: Dusting off the CNY playbook; Analyzing currency reactions to Chinese yuan movements

Bank of America delves into the sensitivity of different currencies to fluctuations in the Chinese Yuan (CNY), spotlighting three key periods of CNY depreciation in the last decade: the 2015-16 mini-devaluation, the 2018-19 US-China trade tensions, and the 2022-23 policy divergence. By controlling for changes in the dollar index (DXY) and volatility index (VIX), BofA aims to precisely gauge the impact of CNY movements on G10 currencies.

Key Points:

• Sensitive Currencies: The Australian Dollar (AUD) and New Zealand Dollar (NZD) consistently display the highest sensitivity to CNY depreciation across all examined periods, highlighting their vulnerability to shifts in CNY’s value.
• JPY’s Recent Sensitivity: The Japanese Yen (JPY) showed increased sensitivity during the 2022-23 period, influenced by carry trade flows, given its status alongside CNH as a favored funding currency.
• EUR’s Stability: The Euro (EUR) demonstrates the weakest correlation with CNY movements, suggesting its resilience amid CNY depreciation, despite significant export exposure to China.

Conclusion:

BofA’s analysis sheds light on the varying degrees of sensitivity among G10 currencies to changes in the CNY’s value. The findings underscore the particular vulnerability of AUD and NZD to CNY depreciation, while highlighting the unique position of the JPY in the latest episode due to carry trade dynamics. Conversely, the EUR emerges as relatively stable in the face of CNY fluctuations, pointing to potential strategic currency considerations for investors monitoring CNY trends.

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