Yuan direction keeps economists guessing
HONG KONG: If you thought the first half of the year was rocky for emerging market economies, brace for turbulence ahead with US dollar strength and a weaker Chinese currency set to keep investors on edge.
The yuan has slid 6% against the dollar since June, and analysts say that if further losses materialise, accompanied by more gains in Treasury yields and the greenback, that will be a volatile mix.
Investors will be tempted to pull capital out of emerging economies across the board; policymakers around the region will be forced to raise rates in response. Already, Reserve Bank of India governor Urjit Patel has warned of the risk of a brewing currency war.
“For high-yield currencies, the combination of a weakening China and a hawkish Fed is no good,” said Stephen Jen, CEO of Eurizon SLJ Capital Ltd in London.
Deutsche Bank said this week that it expects the yuan to trade at 6.95 to the dollar by the end of the year and 7.40 at the end of 2019, compared with previous forecasts of 6.80 and 7.20 respectively.
“The People’s Bank may step in to smooth the path of depreciation but we doubt they will intervene heavily to reverse the trend of depreciation,” Deutsche Bank analysts wrote.
The Chinese currency last week posted its eighth weekly decline, the longest run since the start of the country’s modern foreign-exchange rate regime in 1994.
However, Freya Beamish of Pantheon Macroeconomics notes that so far the currency has merely retraced its steps back to where it was in early 2017, so there is no cause for alarm.
“At this stage, trade tensions are helping the renminbi to weaken, and we’ve seen capital outflows beginning modestly to rebuild,” she said.
However, if the US makes good on threats to impose more tariffs, that would lead to further yuan depreciation, she said: “If we get back to where we were at the end of 2016, then I think we’d start to see markets outside of China reacting to renminbi weakness.”
Ian Hui of JP Morgan Asset Management says trade issues don’t look to be cooling any time soon.
“China appears to be willing to let the yuan be driven more by market forces, as it does relieve some pressure on the economy through cheaper exports,” he said.
“However, Chinese officials will still be wary about letting the yuan weaken too much, causing issues for capital flight and financial stability. Despite the recent weakness, we expect the People’s Bank of China to take a more balanced approach in managing its currency to maintain domestic financial stability. We don’t anticipate the exchange rate weakening past 7 against the US dollar this year.”