Investing.com – Donald Trump’s inauguration is just around the corner and UBS is advising clients to go long this pair to hedge against political risk ahead of the huge day.
Trump’s inauguration will take center stage next week, UBS analysts said in a Jan. 16 note.
“Although we don’t know what his first moves will be, we doubt whether it will be imposing huge tariffs on day one. But that doesn’t mean markets won’t stop focusing on it. Currency markets are not priced for huge tariffs. Large tariff moves could further weaken the CNY more significantly, hurting growth-friendly currencies such as the EUR,” the Swiss bank said.
Given the risks, volatility is likely to raise in the coming months. Options volatility has already increased, although this is more due to diverging economic growth expectations in the US and the rest of the world and country-specific issues such as the UK and Canada. This means that any adverse market developments should continue to lead to higher actual and implied volatility.
The USD/CNY currency pair recently reached up-to-date highs, remaining at the upper end of its fixing range, the Swiss bank said.
“We expect the yuan to come under increased pressure as Trump confirms his China-targeted tariff plans, which could prompt the People’s Bank of China (PBoC) to allow further currency depreciation,” UBS added.
A weaker CNY against the dollar may support mitigate some of the negative effects of tariff increases. Moreover, the frail fundamentals of the domestic economy are likely to weigh on sentiment towards the yuan, contributing to higher demand for currencies and investment outflows.
“Overall, we like to go long, targeting an upcoming move towards 7.50, which could also provide a positive return of 2.1% per year. We believe that setting a stop-loss of 7.20 is reasonable,” UBS said.
At 09:10 ET (14:10 GMT), USD/CNY was slightly lower at 7.3289.
