Chinese yuan to weaken if Fed sticks to policy tightening path - Reuters poll

BENGALURU (Reuters) - The Chinese yuan will erase most of its substantial gains so far in 2018 against the dollar over the coming year, a Reuters poll showed, provided the U.S. Federal Reserve delivers at least three interest rate hikes this year, as most economists expect.

FILE PHOTO: U.S. Dollar and China Yuan notes are seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration/File Photo

The yuan hit a 2-1/2 year high last week and is up nearly 3 percent for the year so far, driven mainly by a sell-off in the dollar and partially on generally higher fixings of the official guidance rate by the People’s Bank of China (PBOC).

The Chinese currency is expected to weaken to 6.41 per dollar in six months and then to 6.44 in a year, according to the poll of more than 60 foreign exchange strategists taken over the past week. It is currently trading around 6.33.

However, the range of forecasts and consensus compared to the previous poll suggest analysts are not convinced about a rebound in the dollar. That was in line with a Reuters poll on major currencies published last week.

After falling nearly 10 percent last year, the dollar index, which measures the greenback against a basket of six major currencies, hit its lowest since December 2014 of 88.671 on Feb. 1.

But it has recovered some on the recent rise in U.S. Treasury yields.

“The recent strong rise in U.S. wages has triggered fears of higher inflation on the markets, to the benefit of the dollar. We see a good chance of it gaining further ground, which would tend to push up USD/CNY further as well,” said Thu Lan Nguyen, FX analyst at Commerzbank, in a note to clients.

“We expect CNY to slightly depreciate again over the coming quarters against USD, due to weaker growth prospects for the Chinese economy.”

The Chinese economy is expected to grow 6.5 percent this year, the slowest annual expansion in 27 years, and 6.3 percent in 2019, a separate Reuters poll found in January.

Despite that, a few currency strategists expect the yuan to gain over the coming year, including the most optimistic call for it to strengthen sharply to 5.65, a level not seen since November 1992.

More than one-quarter of the poll participants forecast the yuan to strengthen over the coming year to above the 2-1/2 year high hit last week.

“We are constructive on the CNY due to positive fundamentals and downtrend in the USD. However, in the short term, USD may rebound further as risk aversion dominates,” said Irene Cheung, senior strategist for Asia at ANZ.

“We forecast further CNY appreciation as capital flows have become more balanced and could shift towards a resumption of inflows as foreign demand for onshore China assets increase.”

The PBOC pledged last week to maintain a prudent and neutral monetary policy in 2018 and said it will deepen market-based interest rate reforms, fend off systemic financial risks and keep the yuan stable this year.

According to a separate Reuters poll on currency positioning taken last week, bullish bets on the Chinese yuan dipped for the first time since December.

Investors also trimmed bullish bets on the Indian rupee to their lowest since January 2017.

The Indian rupee, which gained 6 percent in 2017, is down nearly 1 percent this year against the dollar and is now expected to trade around where it was on Tuesday at various points over the coming 12 months.

The consensus was for the rupee to trade at 64.00 per dollar in six months and in a year, from about 64.27 on Tuesday.

The poll was taken after the Reserve Bank of India (RBI) kept its main repo rate on hold and retained its “neutral” stance at its meeting last week.

“The fair value of the rupee is likely to worsen this year, albeit marginally,” said Tushar Arora, senior economist at HDFC Bank.

“(A) rise in domestic inflation, pressure on the current account deficit, and moderation in FII (foreign institutional investors) flows on account of global monetary policy tightening are some of the factors that could lead to a bit of depreciation in the rupee.”

Polling by Shaloo Shrivastava; Editing by Richard Borsuk