The Chinese yuan is forecast to weaken just 2 percent this year, as China's central bank lowers its midpoint fixings and the dollar rises in anticipation of higher interest rates in the United States, according a Reuters poll of foreign exchange strategists.
The People's Bank of China (PBOC) surprised markets again on Thursday, by fixing the yuan midpoint at 6.5646 per dollar, the lowest since March 2011, and 0.5 percent weaker than the day before. The latest devaluation comes despite repeated claims by policymakers that the continued devaluation of the yuan was unjustified, which might explain why most forecasters were so reluctant to predict much more weakness ahead.
Roughly two-thirds of the over 50 strategists in the survey were polled earlier in the week, before Thursday's yuan fixing. Rabobank had the most aggressive forecast, predicting the renminbi would reach 7.60 in a year. Most of the banks predicting a sharp decline in the yuan were based either in Europe or in the US The yuan has weakened over 1 percent through official lower midpoints in the first four trading days of 2016, dragging with it regional currencies like the Australian dollar, Malaysian ringgit and South Korean won.
"At the current juncture, it's difficult to read the exact economic ramifications of the lower fixings by the PBOC, but its actions are spooking markets and the risk of competitive devaluations is increasing," said Vasileios Gkionakis, head of foreign exchange research at UniCredit. "After all, this is the most sizable depreciation since August and points to a loss of competitiveness for other countries in the region." The Reuters survey of over 50 currency strategists conducted this week predicted the yuan would trade at 6.70 by end-December, the lowest 12-month consensus in Reuters polls since at least January 2013.
That 12-month median is also lower than it was in last month's poll and reflects increasing pessimism among analysts on the yuan's outlook. Indeed, a separate Reuters poll on Thursday showed bearish bets on the yuan were near a six-year high, damaging sentiment towards most other emerging Asian currencies. In a poll in early December, strategists had predicted the yuan would weaken to 6.55 in 12 months. Just a month later, it has breached that level and is now much lower.
"The fixings are going to be towards the lower side, but the moves are going to get smaller from here on. Unless of course, if we see a very pronounced dollar rally against the majors," Gkionakis of UniCredit added. The US Federal Reserve is expected to raise interest rates again in March, after the first increase in almost a decade last month, according to a Reuters poll. Forecasts are that two more increases will follow this year, boosting the dollar.
China's central bank, on the other hand, is forecast to loosen policy again in 2016. The bank cut its benchmark lending rate six times since November 2014 and slashed reserve requirements to boost liquidity and credit growth, to support a weak economy. Beijing's deliberate attempt to rebalance the economy into a consumption-driven one has dramatically cooled growth. It has also had a domino effect on the price of commodities that China imports, such as oil and metals. But two years into the programme, China's factories are shrinking, inflation is muted and economic growth has dipped to a quarter-century low.
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