Top Yuan Forecaster Warns Against Shorting China’s Currency

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(Bloomberg) -- Investors should think twice before betting against China’s currency, according to the most accurate yuan forecaster.

Zhou Hao, an economist at Commerzbank AG, said there is a risk the yuan may strengthen past 7 per dollar in the near term, just months after it breached the symbolic level for the first time since the global financial crisis. The market has not priced in the possibility that China and the U.S. reach a more concrete deal in their dispute, meaning the currency may be vulnerable to sudden gains, he added.

“Investors shouldn’t rule out the possibility that good news on trade talks emerge in the near term,” Zhou said. “So I suggest traders be flexible and corporates not be too speculative when buying the dollar against the yuan.”

The Chinese currency plunged past 7 for the first time in more than a decade in August, stoking fears of capital outflows and further drops. The U.S. later formally labeled China a currency manipulator, though it has said the designation could be lifted once the first part of a trade deal is done.

Top Yuan Forecaster Warns Against Shorting China’s Currency

China’s goal is to end the trade war, Ministry of Commerce spokesman Gao Feng said Thursday at a press briefing, adding the country is working on the text of a phase-one deal with the U.S. The yuan reversed a drop to climb 0.15% to 7.0844 as of 4:29 p.m. in Shanghai.

‘Critical’ Level

Market watchers are split on what an advance beyond the 7 level would lead to. Zhou -- ranked by Bloomberg as the most accurate forecaster for the yuan over the past two quarters -- said the currency will likely fall as the trade dispute causes economic pain. AxiTrader Ltd. strategist Stephen Innes said it may prelude more gains in Asian exchange rates.

The yuan at 7 is “a hugely critical risk-on sentiment level,” Innes said, adding the currency may hit 6.9 by year’s end if China and the U.S. make major progress in negotiations. “I’m long Asian currencies for the first time in two months.”

The yuan surged to the strongest level in nearly two months on Monday after President Donald Trump said China agreed to concessions related to its currency policy and to step up purchases of U.S. agricultural commodities.

While the mini deal marked the biggest breakthrough in the 18-month trade fight, some of prickliest disputes -- such as U.S. accusations of intellectual-property theft -- remain. The yuan is pressured later this week as the central bank weakened its daily fixings and China vowed retaliation if the U.S. passes a bill to support Hong Kong protests.

Trump and Chinese counterpart Xi Jinping could sign a written agreement at the Asia-Pacific Economic Cooperation summit in Chile next month after the two countries hold discussions to hammer out details.

Hopes for further easing of tensions have prompted some investment banks to predict fresh short-term gains for the Chinese currency. Morgan Stanley recommended investors go long on the offshore yuan with a target at 6.95, while Bank of America Merrill Lynch said the currency may test 7 on any short-term deal. Still, Citigroup Inc. and Societe Generale SA are among the brokerages that say the yuan will remain weaker than that level.

“In the longer term, China needs to use managed depreciation to offset the impacts of higher tariffs and stimulate exports,” said Commerzbank’s Zhou, who expects the yuan to trade at 7.15 at year-end. “Officials won’t allow rapid declines -- the policy red line is around 7.2.”

©2019 Bloomberg L.P.

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