August 9, 2018 / 12:42 AM / 2 years ago

Chinese yuan to regain some ground if trade tensions ease

BENGALURU (Reuters) - China’s yuan will regain some of its recent sharp losses against the dollar and appreciate over the next year, but only if trade tensions between the Washington and Beijing subside, a Reuters poll found on Thursday.

FILE PHOTO: Chinese 100 yuan banknotes are seen in this picture illustration taken July 11, 2013. REUTERS/Jason Lee/File Photo

The yuan has weakened almost 5 percent so far this year and hit a 14-month low last week, primarily driven by new tariff threats from the U.S. and retaliatory warnings from Chinese authorities.

Also, by consistently lowering the mid-point reference rate, the People’s Bank of China (PBoC) has allowed the currency to weaken substantially, adding to anxiety in global financial markets.

“We believe the yuan may potentially strengthen against the dollar if the current triggers are removed. Indeed, if U.S. President Donald Trump takes a step back from imposing further tariffs, this may help reverse some of the market concerns about USDCNY,” said Jeff Ng, Asia chief economist at Continuum Economics.

“Further, a rebound in domestic economic metrics could also help tilt the PBoC away from accommodation, keeping USDCNY closer to the 6.50-level. The yuan could also be granted a reprieve if markets expect the Federal Reserve to slow its pace of rate increases or start to worry about the U.S.’ current account deficit.”

The yuan was expected to gain around 2 percent to 6.70 per dollar in a year, according to the poll of more than 60 foreign exchange strategists taken August 6-8. It was trading around 6.82 on Wednesday.

After largely standing aside in recent weeks while the yuan fell, there are signs that Chinese authorities are now looking to put a floor under the currency and discourage bets on further losses that could trigger capital outflows.

On Friday, the central bank said it would require banks to keep reserves equivalent to 20 percent of their clients’ foreign exchange forwards positions in a move to stabilise the yuan.

Still, the 12-month forecast for the yuan was the most pessimistic median in Reuters polls conducted this year.

According to a separate Reuters poll on currency positioning, investors piled bearish bets on the yuan to the highest on record amid the escalating tit-for-tat trade battle between the world’s two biggest economies. [ASIA/FXP]

Beijing on Friday announced tariffs on an additional $60 billion a year worth of imports from the U.S.

China’s retaliatory measures come after the latest U.S. proposal to increase tariffs on $200 billion of Chinese products.

Though data on Wednesday showed China’s exports are holding up surprising well so far, it is early days and the trade battle is expected to put further pressure on its already slowing economy. Growth is forecast to slow to 6.6 percent in 2018, and 6.3 percent in 2019, from 6.9 percent last year, a separate Reuters poll found.[ECILT/CN]

“The rising likelihood of an economic war with the U.S. presents the biggest threat to China’s growth and financial stability since the global financial crisis,” noted Dariusz Kowalczyk, a Hong Kong-based senior emerging market strategist at Credit Agricole CIB.

“We believe Beijing has more to lose in a confrontation and so it is in China’s interests to reach a compromise with Washington rather than going down the path of retaliation. While some battles are likely to be fought, a war will probably be avoided, allowing China to limit the growth slowdown fairly easily via relatively modest credit, monetary and fiscal easing.”

Still, there are few signs that either side is in the mood for concessions at this point, and a few currency strategists expect the yuan to depreciate further over the coming 12 months.

Thirteen of 64 participants said the yuan will weaken below 7.0 per dollar in a year, a closely watched level that has not been breached since the 2008 global financial crisis.

“It is an under-statement to say the near-term outlook for the yuan remains highly uncertain. In the event that trade tensions escalate further, 6.95–7.00 could be the ultimate top for USD/CNY,” noted Khoon Goh, head of Asia research at ANZ.

“Such a move would entail a 10 percent depreciation of the CNY, matching the 10 percent tariff which the U.S. threatens to impose on $200 billion of imports from China.”

But Goldman Sachs told clients in a note that it believes an eventual “deal” still seems to be a reasonable base case assumption. It expected the currency to touch 6.60 in 12 months.

(Other stories from the global foreign exchange poll:)

Polling by Khushboo Mittal and Vivek Mishra; Editing by Jonathan Cable and Kim Coghill

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