Since geopolitical tensions intensified in mid-February, and most Asian currencies underperformed, other than the RMB. The ones hit hardest were: (i) currencies of net oil importers with weak domestic stories to begin with (INR); (ii) currencies that are sensitive to high equity market volatility and have been affected by large outflows (TWD, KRW); and (iii) currencies that were popular longs earlier and have seen positioning being unwound (THB, SGD).

In contrast, we believe the RMB was insulated because: (i) it has historically been uncorrelated with risk sentiment, mainland China’s large economy and as its capital account is not completely liberalised; (ii) market participants are aware that the People’s Bank of China (PBoC) tends to have a preference for stability during times of heightened uncertainty, and indeed the USD-CNY fixings have not shown much of an upward bias on the whole recently; (iii) the mainland Chinese authorities are also already easing policies to spur growth, and so the economy is less likely to be hurt by the likes of high inflation and trade disruptions; and (iv) some market participants may believe that the RMB (CIPS) could be an alternative to the USD (Fedwire and CHIPS) for entities affected by sanctions, either as a means for cross-border trade settlements and financial transactions, or as a store of value.

We think the RMB can stay strong for some time. Apart from risk aversion, we note that the “twin surpluses” in the current account and capital account may persist. On the latter, we are keeping tabs on whether there could be increased North-bound inflows, and also if residents may end up reversing some earlier South-bound outflows (due to risk reduction), similar to what happened in 3Q21. We have lowered our USD-RMB forecasts to 6.30 and 6.35 for 1Q22 and 2Q22, respectively (from 6.40 and 6.45, respectively, previously). We still expect the RMB’s overvaluation and reduced yield advantage to weigh on the RMB later, especially when US rates start to rise and affect the external debt of mainland Chinese corporates.