Chinese yuan to weaken if Fed sticks to policy tightening path
BENGALURU, Feb 14: 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 US Federal Reserve delivers at least three interest rate hikes this year, as most economists expect.
The yuan hit a 2-1/2 year high last week and is up nearly 3 per cent 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 per cent 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 US Treasury yields.
"The recent strong rise in US 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.
The Chinese economy is expected to grow 6.5 per cent this year, the slowest annual expansion in 27 years, and 6.3 per cent 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.
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. —Reuters