Bear­ish yuan calls resur­face amid volatile fix­ings

The Pak Banker - - 6BUSINESS -

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.

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