Yuan to revisit mid-2008 lows over next year if Fed hike spurs dollar - Reuters poll

BENGALURU (Reuters) - China’s yuan will weaken to its lowest level since the financial crisis in the next 12 months as rising chances of a December U.S. interest rate hike boost the dollar, a Reuters poll showed.

A 100 Yuan note is seen in this illustration picture in Beijing March 7, 2011. REUTERS/David Gray/File Photo - RTSRP8V

The survey, which also expects India’s rupee to fall slightly from here, offers a dim outlook for emerging Asia’s top currencies, and by extension, other regional foreign exchange rates that are closely tied to the yuan’s fortunes.

The yuan, also known as the renminbi, is already down over 4 percent against the dollar so far this year, continuing a trend that started last August when Beijing allowed the yuan to slide sharply, which it repeated in January.

It fell over 1.5 percent in October alone as the greenback rose broadly against major global currencies in anticipation of a near-term rate move from the Federal Reserve following solid U.S. economic and job growth.

Still, the survey of over 60 foreign exchange strategists conducted in the past few days showed the yuan falling to 6.80 per dollar by end-January 2017, and to 6.90 by end-October - a drop of almost 2 percent from Tuesday’s 6.78.

That 12-month consensus is the weakest in six years of Reuters polls and, if realised, would mark the lowest level for China’s closely managed currency since mid-2008, just before the collapse of Lehman Brothers brought on a global recession.

“We expect pressure on the yuan to continue through 2017 amid persistent economic uncertainty...,” said Jennifer Lee, economist at BMO Capital Markets.

While the latest run of data out of China suggests that economic growth has steadied for now, the yuan still faces risks from financial outflows and a rising U.S. dollar, Lee added.

BMO’s forecast for the yuan’s 12-month rate was 6.81 to the dollar, somewhat more optimistic than the median. Around a third of respondents had a call of 7.00 or lower.

A Reuters poll last week showed bearish bets on the yuan hit a near 10-month high in the previous two weeks. [ASIA/FXP]

China’s economy expanded 6.7 percent between July-September, the third consecutive quarter of the same growth rate, driven by stronger government spending, adding to its massive debt pile. Growth has been buoyed by a construction boom, fuelled by infrastructure projects and a housing boom, though exports remain weak despite the yuan’s slide.

Preliminary indications are that trend of unwavering growth could extend to the fourth quarter, with an official survey on Tuesday showing China’s manufacturing sector expanded at a faster pace in October.

While the upbeat data may reinforce views that the PBoC won’t act in a hurry, high levels of overcapacity in Chinese industries and worries that a housing rally has peaked will keep alive some hope of easing.

Much will depend on when the Fed next raises rates and the path of policy tightening it projects for 2017.

The vast majority of economists polled by Reuters forecast a hike in the benchmark lending rate at the Fed’s Dec. 13-14 meeting, with about a 70 percent probability, now in line with financial market pricing. [ECILT/US]

The Fed’s solo path of tightening compared with its peers will probably make the dollar drift higher through the coming year on its own, the wider global poll of FX strategists also showed. [EUR/POLL]

The poll also showed the rupee will weaken to 67.00 a dollar by end-Jan 2017 and 67.50 by end October, a fall of 1 percent from Tuesday’s 66.72.

Markets expect the Reserve Bank of India will follow through with another 25 basis point rate cut by end-March, after its surprise move last month.

Polling and additional reporting by Shaloo Shrivastava; Editing by Kim Coghill