Bearish yuan calls resurface amid volatile fixings
Strategists are back to debating the direction of China's currency after the central bank guided the yuan lower on Monday, having let it rise to its highest level of the year against the dollar on Friday. Jan Lambregts, Rabobank's global head of financial markets research, told CNBC on Monday that he's anticipating a ten to fifteen percent depreciation over the next twelve months.
The world's second-largest economy is facing an unprecedented set of economic and policy challenges and in order to overcome them, the government will have to start making more bold moves in the currency, he explained.
"We feel that [yuan depreciation] is a relatively easy step for China compared to the hard, structural reforms they need to do."
Beijing is expected play down the significance of currency weakness but the country's rising economic challenges, including a long-awaited restructuring of state-owned enterprises, leave policymakers with little choice, he continued. Following a volatile start to the year, the yuan (CNY) hit a 2016 high last week following dovish remarks from the U.S. Federal Reserve but recent fixings by the People's Bank of China (PBOC) revived speculation that authorities may prefer a weaker currency.
Monday's mid-point level was 6.4824 per dollar, 0.3 percent weaker than the Friday's mid-point rate of 6.4628. China's central bank lets the yuan spot rate rise or fall a maximum of 2 percent against the dollar, relative to the official fixing rate.
Like Lambregts, Michael Heise, chief economist at Allianz, said the yuan could drop to around 7 per dollar as soon as this year. In a recent CNBC editorial, he explained that would bode well with the government's objective of a market- driven exchange rate.
Should these predictions come true however, it would further damage Beijing's credibility in the eyes of global markets. Ever since the yuan's landmark devaluation last August, speculation for further weakness was rife but Beijing has repeatedly shut down those assumptions, warning that it was not targeting more depreciation.
Over the weekend, People's Bank of China (PBOC) governor Zhou Xiaochuan said capital outflows were on the decline, indicating that the central bank may no longer be using its currency reserves to prop up the yuan.