Top Asia FX Forecaster Sees Trade Risk Returning to Hit Yuan

(Bloomberg) -- China’s yuan will end the year as one of emerging Asia’s worst-performing currencies as the relief over the signing of the phase-one trade deal dissipates.

So say analysts at MUFG Bank Ltd., which topped the currency-forecasting stakes for the region in the final quarter of last year.

President Donald Trump won’t change his protectionist stance even after signing the deal this week as the two countries prepare for the phase-two agreement, weighing on the Chinese currency, said the bank, which is among the most bearish forecasters for the yuan. The Philippine peso and the Indian rupee will also underperform in part because of local headwinds.

“People are very bullish and they’re not really seeing any clouds in the sky” for the yuan, said Cliff Tan, Hong Kong-based head of global markets research for East Asia at MUFG. “They’re kind of acting as if Trump is going to be a very different creature when it comes to trade this year. The crusty cake of protectionism that sort of enveloped the global economy is still going to be there.”

While the yuan has remained strong, pitfalls ahead include meeting agricultural commitments in the agreement, Tan said. The currency rose to 6.87 per dollar as of 11:26 a.m. in Shanghai on Friday, and earlier touched its strongest since July.

MUFG predicts it will decline to 7.21 by the end of this year, compared with the median year-end estimate in a Bloomberg survey of 6.9.

Here are MUFG’s forecasts:

While stimulus efforts have stabilized the Chinese economy, expansion will slow again by the middle of the year and credit problems could worsen, Tan said. The world’s second-largest economy grew 6.1% in 2019, the weakest pace in almost three decades.

He likened China to a runner with a 120-kilogram of debt on its back.

“Even though they’re able to run faster for a little while, eventually they’ll get tired again,” he said.

China’s debt is fast approaching 310% of gross domestic product, one of the highest in emerging markets, according to the Institute of International Finance.

Among the underperformers, the slide in the Philippine peso will be driven by wider trade and current-account deficits as import demand for capital goods increase amid a surge in infrastructure spending, said MUFG’s Sook Mei Leong, Singapore-based global head of markets research for Southeast Asia.

Financial-sector woes in India will continue to be a drag on economic growth in 2020, reducing the attractiveness of its assets, she said.

When it comes to winners, MUFG is picking the Taiwan dollar with the currency expected to be resilient as foreign funds pour money into the island’s stocks related to 5G technology.

Billions of dollars are also likely to be reinvested back by Taiwanese life insurers from the redemption of Formosa bonds -- debt listed in the island but denominated in the greenback, Tan said.

--With assistance from Matt Turner and Wei Lu.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, ;Sofia Horta e Costa at shortaecosta@bloomberg.net, Karl Lester M. Yap, Fran Wang

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