Yuan Will Weaken to 7 in 2018 and Go Lower in 2019, UBS Says

(Bloomberg) -- With the yuan facing greater pressure, the currency is seen weakening to 7 per dollar by the end of the year and continuing lower in 2019.

The currency will hit 7.3 to the dollar by the end of 2019, although “if the U.S. imposes 25 percent tariffs on all Chinese exports, USDCNY could move toward 7.5 in 2019,” UBS Group AG’s head of China economic research Wang Tao and others wrote in a research note. The yuan traded onshore at 6.9254 per dollar at 3:01 p.m. in Shanghai.

Ongoing depreciation pressures on the Chinese currency will likely intensify, Wang wrote, as the trade war plays out, the difference between rates in the U.S. and China narrows further, and China’s current account surplus shrinks, or even drops into deficit.

“The transformation of China’s current account surplus into a deficit will not only take away a dependable buffer for capital outflows, but it also may hurt confidence and hasten outflows, adding more pressure on the yuan," she wrote, predicting the first full-year deficit in 24 years in 2019.

The currency will slide, but there will be no “sharp depreciation” as policy makers are expected to “keep tighter controls on outflows, closely manage CNY daily fixing and open domestic capital market” to keep the yuan from depreciating significantly, she wrote.

The currency has tumbled more than 9.3 percent against the dollar over the past six months, making it one of the worst performers in Asia. The People’s Bank of China’s Governor Yi Gang played down the yuan’s moves in an interview with Bloomberg over the weekend, saying the yuan’s volatility is “normal” and it will stay in a reasonable range in 2018 against the backdrop of an appreciating dollar.

Wang’s prediction is stronger than the majority view of traders and analysts surveyed by Bloomberg last week. A majority of them saw the currency breaching the key psychological level of 7 per dollar by the middle of next year.

©2018 Bloomberg L.P.