Yuan will benefit from its safe haven status

The renminbi (CNY) has demonstrated its resilience to global market volatility in recent months, holding steady against the US dollar and other currencies. This has happened despite China experiencing a significant economic slowdown, a narrowing in China-US yield spreads, and most recently, the Russia-Ukraine war.

Following a strong performance in the second half of 2020, the CNY continued to appreciate against the USD in 2021 even as the dollar strengthened against other currencies in anticipation of US monetary policy normalisation (as suggested by the USD nominal effective exchange rate, NEER). The CNY rose sharply against its trade-weighted NEER, as represented by the People's Bank of China (PBOC)'s China Foreign Exchange Trade System (CFETS) basket, before slowing recently.

We think China's renminbi (CNY) will hold steady in the coming months, as recent experience suggests the currency tends to serve as a safe haven during periods of heightened market volatility.