Standard Chartered: no Fed rate raise expected before start of 2018

Bank sees the Chinese yuan supported above 6.7 against the US dollar in the short term

PUBLISHED : Tuesday, 13 September, 2016, 7:26pm
UPDATED : Tuesday, 13 September, 2016, 10:15pm

The US Federal Reserve won’t raise interest rates until at least the beginning of 2018, Standard Chartered forecasts.

“The Fed is not likely to raise the interest rate this year, and the possibility for a rate hike in 2017 is also quite slim. The Fed is expected to raise interest rates in the start of 2018 at the earliest,” said Kelvin Lau, a senior economist at Standard Chartered Hong Kong.

Under that scenario, the bank sees the yuan at 6.67 against the US dollar by the end of this year, as the Chinese government has enough ammunition to support the currency above 6.7 against the greenback in the short term.

Standard Chartered’s prediction for the yuan is optimistic compared with the results of a survey it conducted in August, which showed about 53 per cent of respondents expecting the currency to weaken further against the US dollar in the next three months. Only 7 per cent saw the currency strengthening.

The generally pessimistic forecast is accompanied by companies’ weak sentiment towards the usage of the yuan in offshore markets. This could disappoint the Chinese government, which has been trying to internationalise its currency.

“Weak market confidence, soft China growth and lingering uncertainty about RMB policy should keep existing users of the yuan cautious and potential users on the sidelines for longer,” said Lau.

According to the survey, no quick turnaround is expected for the usage of offshore yuan, including its use in deposits, cross-border trade settlement, foreign exchange transactions, loans and bonds.

Most companies surveyed did not expect yuan deposits in offshore markets to pick up in the next six months, and many forecast further declines. Hong Kong saw a drop of 6.2 per cent in yuan deposits in July from a month earlier, while deposits in Taiwan and South Korea barely grew, according to the survey.

Renewed concerns about depreciation, initially sparked by Britain’s decision to leave the European Union and more recently by a less dovish tone struck by the Federal Reserve, could only weigh further on depositor sentiment, said Standard Chartered.

In regards to foreign trades, while onshore respondents seemed to be more active in adopting the yuan for trade settlement, most offshore companies showed no strong enthusiasm .

The downbeat attitude towards the yuan has dampened the appetite for Dim Sum bond issuance in Hong Kong, as well as Formosa bonds - yuan-denominated bonds in Taiwan.

Most corporates that responded to the survey cited uncertainty around China’s economic outlook, a lack of clear communication on policy about the yuan and the currency’s downward trajectory as the key concerns that hold them back from the currency.