The Chinese yuan and Indian rupee are expected to weaken over the course of the coming year, although not as much as other emerging market currencies, as expectations of higher interest rates in the US boost the dollar, a Reuters poll found. Global investors moved back into US sovereign bonds and the dollar this week after Federal Reserve Chair Janet Yellen signalled the Fed's first rate hike in almost a decade could come as soon as next month.
That news sent US two-year Treasury yields to their highest levels in 4-1/2 years and also pushed the dollar higher against a basket of currencies, reversing the general trend seen last month. While the narrowing bond yield spread between the US and major emerging economies is likely to dent currencies in Latin America and Africa in a bigger way - some are set to hit record lows - the yuan and the rupee will only be slightly affected.
The poll of more than 20 foreign exchange analysts, conducted this week, showed the yuan will trade around 6.50 to the dollar in 12 months, a fall of over 2 percent from Friday's 6.35. Those expectations of the currency weakening have largely been constant since August, when the People's Bank of China wrongfooted markets by devaluing the yuan by the most in 21 years to safeguard a slowing economy and boost exports.
Although Beijing has tried to reassure markets that another deliberate exchange rate cut will not follow, the consensus that the yuan will steadily drift lower, on hopes of further policy easing in China coupled with higher US rates, has stuck. "The PBOC is not independent of the central government, and has multiple targets of maintaining both price stability and high growth," economists at Goldman Sachs wrote in a note.
"We still expect some depreciation in the yuan fix, on the back of our global forecast for a pick-up in dollar strength." On Friday the PBOC set the yuan mid-point at 6.3459 per dollar, down from the last close at 6.3466. Whether the Fed hikes or not will, however, largely depend on key economic data coming out of the US over the next month, starting with the payrolls report on Friday.
Economists polled by Reuters predict US employers picked up hiring in October and added 180,000 jobs to the economy, after slamming the brakes over the previous two months. The unemployment rate is 5.1 percent. The poll also showed the Indian rupee is expected to depreciate slightly to 66.00 against the dollar in six months and fall further to 66.50 in a year from Friday's 65.78.