04:51 AM EDT, 04/17/2024 (MT Newswires) -- China's renminbi could be on the cusp of another episodic bout of depreciation, which is a tried and tested recipe for US dollar strength relative to other currencies in Asia and beyond, according to strategists at ING.

A strong dollar and market pessimism about the Chinese economic growth outlook have kept USD/CNY and USD/CNH in an uptrend over recent weeks and months but the pairs could now be on the verge of their next leg higher.

That's if the latest fixings of the USD/CNY central parity rate can be taken as a sign of things to come from the Peoples' Bank of China, which has set the fix above 7.10 twice this week and for the first time since March 22 when the renminbi sustained its largest intraday loss since February 2023.

At last look on Wednesday, the managed-floating USD/CNY was at 7.2333, while the offshore pair USD/CNH was at 7.2469.

"Subsequent fixes were made sub 7.10, but last night the PBoC fixed USD/CNY at 7.1028 - suggesting it was acceding to market pressure to allow the renminbi to weaken," said Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

"The prospect of the PBoC allowing a weaker renminbi is a bullish one for USD/Asia and for the dollar in general. The highest correlations with the CNH in the G10 space are the Australian and New Zealand dollars," he added in a Tuesday note to clients.

USD/CNY has been trading near 7.24 and threatening the upper limit of its permissible daily trading bands ever since March 22 when the PBoC's higher fixing spooked the market and prompted speculation that it could be about to allow the renminbi to catch up with trade partner currencies that have all depreciated against the dollar in recent weeks and months.

The managed-floating USD/CNY pair is permitted to trade no more than 2% above or below the established central parity fixing at any given time. However, Reuters' calculations based on the PBoC's methodology for establishing the fix have consistently suggested in recent weeks that the central parity rate should be closer to 7.24, which would allow USD/CNY to trade as high as 7.38.

"The daily USD/CNY reference rate has been set consistently below the pre-fix survey average expectation since June 2023. The downside deviations lately have also reached levels last seen in autumn 2023," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

"The intense focus on stabilizing the bilateral USD/CNY exchange rate, however, has caused the trade-weighted renminbi to appreciate year-to-date. Essentially, the trade-weighted CNY is being lifted by the US dollar's broad-based climb," he added on Tuesday.

While the PBoC has succeeded in containing the upward pressure in USD/CNY over recent weeks, the offshore USD/CNH pair has traded above the fixing to around 7.26 in recent days and many analysts have warned that further renminbi depreciation could be likely.

This is an upside risk for measures of the broad US dollar because many trade partner currencies including those in Asia and the emerging markets often track the renminbi. This may be because movements in the renminbi can lead those trade partner currencies to appreciate or depreciate by default when they're measured in trade-weighted terms.

"In short, should the PBoC start to allow a higher series of USD/CNY fixings - acceding to market pressure - it could prove a boost to the dollar around the world," ING's Turner said.

Strategists at ING said on Tuesday that the Australian dollar, New Zealand dollar, South African rand and Singapore dollar are likely to be among the most sensitive to any fresh lurch lower by the renminbi.

However, currencies like the euro, pound sterling, Japanese yen and Canadian dollar have also all been known to be sensitive to twists and turns in the trajectory of the Chinese currency.

"The PBoC looks like they have blinked a little bit as the CNY fix came in higher last night, finally," said Brent Donnelly, president at Spectra Markets and a veteran currency trader with a career spent between hedge funds and global banks like HSBC and Nomura.

"It's rare for spot USD/CNY to just sit there exactly 2% above the fix for so long. That's the max that the PBoC will allow, and we have been there for ages. In the past, this either meant they slam it or they devalue," he added in a Tuesday note to clients.