Investing.com – Donald Trump’s inauguration is just around the corner and UBS has advised clients to go long the pair to hedge policy risks before the big day.
In a light data week, Trump’s inauguration will take center stage next week, UBS analysts said in a note dated Jan. 16.
“While we don’t know what his first steps will be, we doubt it will be to impose high rates on day one. But that doesn’t mean the markets won’t focus on it anymore. FX markets are not priced for high rates. Large rate moves could still weaken the CNY more meaningfully, hurting growth-enhancing currencies such as the EUR,” the Swiss bank said.
Given the risks, volatility is likely to increase in the coming months. Options volatility has already increased, although this is more due to divergent economic growth expectations between the US and the rest of the world and country-specific issues such as those in Britain and Canada. This means that any negative market developments should still lead to higher actual and implied volatility.
USD/CNY has recently reached new highs and is trading at the upper limit of the confirmation range, the Swiss bank said.
“We expect the yuan to come under increasing pressure once Trump tightens his tariff plans for China, which could lead to the People’s Bank of China (PBoC) allowing further depreciation of the currency,” UBS added to.
A weaker CNY against the dollar could help mitigate some of the negative impact of any rate increases. Moreover, vulnerable domestic economic factors are likely to weigh on yuan sentiment, contributing to higher currency demand and greater investment outflows.
“In general, we like to be long and are targeting a move towards 7.50 in the near future, which could also provide a positive carry of 2.1% per year. We believe a stop-loss of 7.20 is sensible,” UBS said.
At 09:10 ET (14:10 GMT), USD/CNY was trading marginally lower at 7.3289.
