Dollar Slide Spurs Yuan Forecast Revisions, Worry on Speed

(Bloomberg) -- The tumbling dollar has wrecked forecasters’ predictions for China’s yuan, spurring a rush of raised forecasts, along with concerns about the speed of the move.

With the yuan rapidly approaching the level against the dollar last hit when China devalued it in August 2015, at least seven financial firms boosted their projections this week. More may need to join in: the median year-end forecast among analysts surveyed by Bloomberg now stands at 6.45 per dollar -- more than 2 percent weaker than the level around 6.2822 Friday.

Public commentary in China may add to expectations for further appreciation. A front-page column in the Securities Times on Friday said the yuan may keep rising versus the greenback this year amid China’s improved capital flows and economic development.

Dollar Slide Spurs Yuan Forecast Revisions, Worry on Speed

"Our bias is for yuan to gain more strength this year," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. "Although the Chinese currency already looks overbought, another round of dollar weakness could trigger a selling spree again, and accelerate the yuan rally."

The yuan is joining in a broad rally of most Asian currencies against the dollar, as the Trump administration pursues a more aggressive approach to shrink the U.S. trade deficit -- a strategy many investors see as including a preference for a weaker currency. The question could become what’s the tolerance level for Chinese policy makers, with an appreciating yuan potentially hurting China’s exports.

"Having gained so much, China wouldn’t let yuan surge too fast for the sake of exports, which is needed as the economy faces uncertainty given China aims at deleveraging this year," said Nathan Chow, senior economist at DBS Bank Hong Kong Ltd. "It would be easier for the Chinese central bank to manage yuan appreciation than try to stop it from depreciation."

The following is a round-up of views on the Chinese currency:

  • Australia & New Zealand Banking Group Ltd. (analysts including Khoon Goh, head of Asia research)
    • Raised its end-2018 forecast for the yuan to 6.25 per dollar from 6.55
    • Capital flows have become more balanced and could shift towards a resumption of inflows as foreign demand for onshore China assets increase
    • The CFETS RMB Index is likely to be kept broadly within a stable range
  • China International Capital Corp. (analysts including Mengyun Zhang)
    • Lifted its end-2018 prediction for the yuan to 6.18 from 6.28, citing its downward revision for the Dollar Index to 87 from 90
    • Flow of capital from emerging markets including China to the U.S. should continue to lose momentum
    • China’s improving economic fundamentals in 2018 to provide solid support to the renminbi
  • Skandinaviska Enskilda Banken SA (analysts including Sean Yokota, head of Asia strategy)
    • Boosted end-2018 estimate for the yuan to 6.10 from 6.30
    • Sees a more open capital account and an increase in the yuan’s reserve currency status
  • Mizuho Bank Ltd. (Ken Cheung, senior Asian FX strategist)
    • Raised end-2018 projection for both onshore and offshore yuan to 6.50 from 6.80, given recent renminbi appreciation and a heavy dollar selloff
    • Still sees modest renminbi depreciation this year, given onshore investors remain keen to pour money into overseas assets, despite more bullish yuan outlook
  • ING Groep NV (Iris Pang, economist)
    • Lifted end-2018 forecast for the yuan to 6.10 from 6.30, mostly due to weak dollar and demand from exporters before the Lunar New Year
    • With the rapid slide in the dollar, Chinese exporters may chase after the trend to convert their dollar receipts into the yuan, which could give China’s currency an extra push nearer the Lunar New Year
  • UBS AG (analysts including Wang Tao, head of China economic research)
    • Revised 2018 CNY forecast to 6.2 from 6.4
    • Expect U.S.-China trade frictions to increase in 2018, but yuan will not be used as a tool in response to U.S. trade measures
    • PBOC will prefer to keep yuan basket broadly stable, leaving CNY pivoting mostly on dollar movements
  • MUFG (analysts including Cliff Tan, east Asian head of global markets research)
    • Raised CNY year-end target to 6.55 per dollar from 6.80
    • Still see a return of credit problems stimulating more outflows as year-end approaches
    • Don’t anticipate capital inflows to materialize as in earlier this decade; the recent move feels more like positioning by proprietary traders

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