Across The Border | Yuan’s value and capital outflows expected to stabilise
Fed intentions and health of mainland economy key to analysts’ expectations
Fading fears of sharp yuan depreciation have helped end a recent string of contractions in mainland China’s foreign exchange reserves.
Analysts say the People’s Bank of China still has a great deal of firepower with which to manage FX market expectations and the yuan should stay broadly stable against the greenback this year unless market views of US Federal Reserve Board intentions change or a deteriorating economic situation on the mainland sparks a massive outflow of assets.
“The appreciation of the yuan against the US dollar over the past couple of months has shifted market expectations for the currency, with concerns about the possibility of a large-scale depreciation now receding and outflow pressures easing as a result,” Capital Economics’ China economist Julian Evans-Pritchard said in a recent research note.
After depreciating 1.3 per cent in January, the yuan stabilised in February and then appreciated 1.6 per cent against the US dollar last month.
The forward premium of offshore yuan against the greenback is also reflecting much improved sentiment.
The PBOC should have plenty of firepower to keep the renminbi broadly stable in trade-weighted terms this year
As markets have calmed down, average daily USD/CNY trading volumes have also declined, easing to US$16 billion in February and US$19 billion in March after spiking at around US$30 billion to US$40 billion in early January, according to UBS estimates.