Yuan's outlook buoyed by growing hopes for trade deal: Reuters poll

BENGALURU (Reuters) - China’s yuan will trade around current rates in the coming months as the authorities keep a tight leash on the partly-managed currency, according to a Reuters poll of currency analysts who upgraded their forecasts from last month.

FILE PHOTO: Chinese 100 yuan banknotes are seen in a counting machine while a clerk counts them at a branch of a commercial bank in Beijing, China, in this March 30, 2016 file picture. REUTERS/Kim Kyung-Hoon/File Photo

The yuan, also known as the renminbi, weakened about 6 percent in 2018, but has regained more than 2 percent this year as the United States and China appear to be inching toward a trade deal and the People’s Bank of China (PBOC) sets consistently higher daily reference rates.

The latest Reuters poll of over 60 analysts, conducted mostly before the annual gathering of the National People’s Congress (NPC), showed the yuan would weaken slightly to 6.77 in six months and then trade at 6.70 in a year, around where it was on Tuesday. That was an upgrade from February’s poll.

“The outlook for the Chinese renminbi has turned somewhat more constructive,” noted Erik Nelson, currency strategist at Wells Fargo. “While the U.S.-China trade tensions are not yet resolved, the tone of the discussions has become more positive. A less hawkish Fed should also be helpful for the renminbi.”

Earlier this year, the U.S. Federal Reserve made a U-turn on its policy of steady interest rate increases and signaled rates for the time being will remain on hold.

The latest outlook is a stark shift from a poll in January, where a majority of strategists predicted the yuan would weaken to 7 per dollar or above in a year on an ongoing economic slowdown and likely policy easing. Only nine respondents do now.

Bets in favor of the yuan also rose to their highest in almost a year, according to a separate Reuters poll on currency positioning. [ASIA/FXP]

A pledge by China’s state planners on Tuesday to increase the flexibility of the yuan’s exchange rate set off market speculation that a tweak to official wording could mean changes to the country’s tightly-managed currency regime.

“We are surprised by the wording ... which is very vague,” noted Iris Pang, Greater China economist at ING. “We will have to see if the U.S. accepts this vague exchange rate mechanism as an answer to its request not to depreciate the yuan.”

In response to mounting evidence that the U.S.-China trade war is hurting the world’s second-largest economy, the government lowered its 2019 growth forecast to 6.0-6.5 percent.

But at the opening of the 10-day annual meeting of China’s parliament, Chinese Premier Li Keqiang announced significant cuts to value-added tax, which could support manufacturing activity.

Polling by Khushboo Mittal; Editing by Jonathan Cable and Jacqueline Wong