Asia FX outlook improves but yuan to lose ground on trade dispute: Reuters poll

BENGALURU (Reuters) - The outlook for emerging Asian currencies has brightened for the coming year as the trade dispute between the U.S. and China has further underscored a weak dollar view, but that uncertainty has also dulled the yuan’s allure, a Reuters poll found.

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

While Asian currencies, which are heavily exposed to global trade, should have taken a hit from the ongoing tit-for-tat trade row and on expectations for faster rate hikes from the U.S. Federal Reserve, most of them have gained this year. (World FX rates in 2018 -

The latest Reuters poll of nearly 70 foreign exchange strategists polled April 3-6 showed most emerging Asian currencies will appreciate anywhere between 0.5 percent and 3 percent by this time next year against the dollar.

The U.S. currency is down around 2 percent this year and the outlook has dimmed further as the dollar has fallen in recent weeks.

“The prospect for Asian currencies is still very strong based on the weak dollar scenario,” said Prakash Sakpal, ING Asia economist in Singapore.

“Coming into 2018, exports haven’t fared badly. Although we may have a potential risk to the economy from the trade war, that is still not the baseline expectation. The pressure for more subdued war is in place.”

In line with those expectations, a separate Reuters poll on positioning showed bullish bets on most Asian currencies increased over the past two weeks.

But the latest poll showed the Chinese yuan, which posted its biggest quarterly gain in a decade in the previous quarter and is up about 3 percent against the dollar so far in 2018, was set for a dull year ahead.

The yuan CNY=CFXS is now forecast to shrug off some of those gains and fall 0.8 percent to 6.35 per U.S. dollar in a year from around 6.30 on Friday. But the 12-month consensus is stronger than the 6.40 expected in March.

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

A series of Chinese data over the coming weeks is expected to show the world’s second-largest economy, which is still largely export-driven, has slowed slightly partly due to the growing risks from the Sino-U.S. trade row.

Export growth may get worse with an escalating trade dispute. China has vowed to fight back “at any cost”.

Still, about 45 percent of over 60 strategists who had a 12-month view, forecast the yuan to strengthen, including the most optimistic call for it to rise to a record high of 5.90 in a year.

Expectations for yuan appreciation have been driven by the recent trend of a stronger official guidance rate by the People’s Bank of China.

The trade spat has led some to view Beijing as amenable to letting the yuan rise at this stage to mitigate some of the tension.

“Though markets occasionally treat U.S. President Trump on trade as a paper tiger, that is not the case in Beijing as a stronger currency is again proffered as an olive branch to Americans,” noted Sook Mei Leong, ASEAN head of global markets research at Mitsubishi UFJ Financial Group.

China’s central bank also raised the rate on 7-day reverse repurchase agreements by 5 basis points to 2.55 percent last month just after the Fed’s rate hike - mostly to avoid risking a resurgence in capital outflows from China.

Improved foreign investment inflows will be a supportive backdrop for other Asian currencies, the poll showed.

The South Korean won KRW= was predicted to gain over 1 percent on improved sentiment following a renegotiated trade deal with the United States. The Singapore dollar SGD= is forecast to gain 2.7 percent.

The Malaysian ringgit MYR= is forecast to appreciate around 2 percent this year despite political developments that made way for general elections sooner-than-expected.

The Indian rupee INR=IN, which has had a rough year so far falling nearly 2 percent, is seen paring those losses and fetching 64.40 in a year, up 0.8 percent from 64.90 it was trading on Friday.

While those forecasts are largely driven by bets against the dollar, the rupee will also be supported by expectations the Reserve Bank of India is more likely to raise rates rather than cut over the coming year.

Reporting by Shrutee Sarkar and Rahul Karunakar; Polling and analysis by Mumal Rathore and Shaloo Srivastava; Editing by Ross Finley and Shri Navaratnam