The prospective shift in interest rate differentials over the next few years suggests further CNY depreciation against the USD is likely. Key Quotes: "If the USD also appreciates against other currencies, that may well allow the basket arrangement to persist. However, our forecasts for the currencies which comprise the basket suggest this will be difficult. For instance, we expect both the EUR and JPY, the two largest components of China’s currency basket, to appreciate against the USD over the next couple of years. In this situation, will the CNY follow the basket or the macro? We suspect it might follow the basket for a while, but the economics is likely to be the ultimate arbiter on where the CNY heads, and that suggests medium term depreciation." For more information, read our latest forex news.