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Currencies

Will the yuan deteriorate past 7 per dollar? Don’t bet on it happening any time soon, survey shows

PUBLISHED : Monday, 15 October, 2018, 1:04pm
UPDATED : Monday, 15 October, 2018, 1:04pm

China is unlikely to let the yuan weaken past the key psychological level of 7 per dollar any time soon, according to market observers.

Just three of 18 traders and analysts surveyed Wednesday and Thursday said the Chinese currency will breach that milestone in 2018, though a majority see it happening by the middle of next year. Falling beyond 7 for the first time in a decade would further strain relations with the US and spur capital outflows, some respondents said. The yuan fell 0.37 per cent to 6.9146 per dollar Friday.

The yuan edged close to 7 last week after the People’s Bank of China announced a cut to the reserve requirement ratio for a fourth time this year, reflecting a growing divergence with US monetary policy. Pressure on the currency, which has tumbled 9 per cent over six months, eased in the past few days amid reports Donald Trump and Xi Jinping plan to meet in November and that US Treasury Secretary Steven Mnuchin is being advised not to name China a currency manipulator.

“We expect that the trade uncertainty will keep the yuan weak, but the Chinese authorities likely want to avoid a situation of snowballing negativity surrounding the currency,” said Julian Wee, an investment strategist at Credit Suisse Private Banking in Singapore. “Existing capital controls and improving economic data from policy stimulus should help to partially counter the negative impact of the trade tensions.”

Including the three who see a break of 7 this year, 11 respondents expect the yuan to pass that mark by the end of June, citing reasons from a stronger US dollar to a worsening trade conflict. There’s some disagreement on the consequences of a move beyond 7: Mizuho Bank’s Ken Cheung said falling past that level would be “catastrophic to China’s economy and financial stability,” while Standard Chartered’s Ding Shuang does not foresee large outflows due to capital controls.

Here are some highlights of respondents’ views:

  • Mizuho Bank (Ken Cheung, senior Asian currency strategist)

The yuan is unlikely to break 7 this quarter; the PBOC will use “every means” to defend the currency, such as intervention and tighter capital controls

Outflows and overshooting yuan weakness would be “catastrophic” to the economy and financial stability

Foreigners would hesitate to invest heavily onshore if the yuan passes 7

  • Standard Chartered (Ding Shuang, Greater China and North Asia chief economist)

Will be likely to breach 7 by the end of March; China may hold the line this year to keep the door open for trade negotiations with the US and to prevent individual investors from buying foreign currency

Large outflows may not materialise even if the yuan hits 7, as China may tighten control

A fall past 7 could lead to weakness in emerging-market currencies

  • United Overseas Bank (Heng Koon How, head of markets strategy)

Could break 7 in the first quarter, when exports may see more significant negative impact from the trade conflict

China will continue to apply targeted fiscal stimulus and monetary support, which will keep the currency weak

The PBOC will try to ensure stability in the exchange rate and limit the pace of depreciation; there’s a risk that outbound investment quotas will be temporary reduced or suspended

Once the yuan breaks 7, stay cautious on emerging-market currencies and expect volatility

  • Malayan Banking Berhad (Fiona Lim, senior currency analyst)

May break 7 as soon as this quarter, as the Fed continues to raise borrowing costs

Depreciation can be slowed by using the counter cyclical factor in the fixing, selling the dollar offshore and issuing PBOC bills in Hong Kong

Bloomberg’s survey involved 12 strategists, economists and researchers based in Hong Kong, Shanghai, Beijing and Singapore, and six currency traders at Chinese banks.

Survey respondents who agreed to be identified were from Scotiabank, Mizuho, Standard Chartered, DBS Bank Hong Kong, Australia & New Zealand Banking Group, Malayan Banking, China Financial Futures Exchange, United Overseas Bank, China Merchants Bank, Chinese Academy of Social Sciences, Natixis and Credit Suisse Private Banking.

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