Breaking News
0

Yuan's drop aligns it with China's cooling economy, easier policy

ForexJan 21, 2019 11:08PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Illustration photo of a China yuan note

By Winni Zhou and Noah Sin

SHANGHAI/HONG KONG (Reuters) - A surprising rally for China's yuan over the turn of the year has been cut short by widespread expectations that Beijing will ramp up policy easing in coming months to avert a sharper economic slowdown.

The yuan has retreated to the weaker side of 6.8 per dollar this week, but is still up nearly 3 percent since early December on hopes that Washington and Beijing may be inching toward a trade deal.

Gains in a currency that was one of Asia's weakest in 2018 were also fueled by expectations that Beijing does not want to see the currency drop too much, in case it becomes a sticking point in negotiations with the Trump administration.

But analysts say mere optimism over trade talks cannot take it any higher, unless it's driven by a dramatic decline in the dollar. Caution over trade and the extent of further Chinese easing are likely to cap the yuan's gains.

Trade negotiators are facing an early March deadline and Washington has threatened to sharply hike tariffs on Chinese goods if there are no substantial signs of compromise from Beijing.

"If we look back, the three factors driving renminbi depreciation, including dollar appreciation, the trade war and interest rate differentials last year, only dollar appreciation has turned," said Tommy Xie, an economist at OCBC Bank in Singapore.

Uncertainties over trade, China's slowdown and policy easing would cause the yuan's yield differences with the dollar to narrow, and place it under pressure, he said.

Stefan Hofer, chief investment strategist at the Hong Kong branch of private bank LGT, expects the yuan to weaken to 6.9 in three months and then recover to 6.7 in 12 months.

Hofer said China's central bank should prioritize restoring investor confidence in its capital markets, in particular its equity markets which plunged last year. Currency stability is key to that, he says.

Analysts at Morgan Stanley (NYSE:MS) said last week that they had turned bullish on the yuan, both because the People's Bank of China (PBOC) would refrain from intervening during trade talks and as companies convert more dollars into yuan ahead of Lunar New Year payments.

The currency fell more than 5 percent in 2018, and at one point had looked set break through a decade-low of 7 per dollar.

Andy Seaman, chief investment officer at Stratton Street in London, is long the yuan, even though his fund mainly buys Chinese dollar bonds rather than the domestic ones.

He says the yuan's fundamentals do not justify its weakness and it was weak only because of the dollar's broad strength.

Authorities are also likely to want to keep the yuan stable ahead of China's debut in global bond indexes. A phased inclusion of yuan-denominated government debt in the Bloomberg Barclays (LON:BARC) Global Aggregate Index is scheduled for April.

GRAVITY DEFYING

Even yuan bulls concede its recent gains have been gravity-defying, with some China watchers saying the economy may be in the midst of a significant slowdown.

Data on Monday showed fourth-quarter economic growth cooled to 6.4 percent on-year, the weakest since the global financial crisis. That dragged full-year 2018 growth to 6.6 percent, the weakest in 28 years.

Growth is set to cool further this year, with some analysts predicting it could drop below 6 percent this spring, before support measures start to stabilize activity around mid-year.

Stuart Ritson, portfolio manager for emerging market debt at Aviva (LON:AV) Investors, noted the yuan had rallied despite obvious risks, including a decline in the current account surplus.

"I'm just not too sure as a policy tool, given the sensitivity during the trade talks, that it's possible to really allow the currency to weaken too much."

HEADWINDS

Most analysts polled by Reuters at the beginning of this year believe the yuan will weaken below 7 within six months.

Analysts say the yuan's strength gives the PBOC room to cut interest rates and pump cash into markets, a change from last year when capital outflow risks were a key concern as yields fell and the yuan was weakening.

Despite losing its yield advantage over dollar rates, outflows were moderate in 2018, with only a modest drop in FX reserves.

But falling local yields could drag on the yuan later this year. While the Fed has now hinted future rate rises may be slower, U.S. yields are still rising. Chinese three-month yields are now 11 basis points below U.S. yields, a sharp turn from being 250 points higher early in 2018.

"Even though there is no basis for yuan depreciation, there is no basis for a unilateral appreciation either," said Stephen Chiu, FX and rates strategist at China Construction Bank (Asia) in Hong Kong.

China might be willing to let the yuan fall if that depreciation was justified by fundamentals, such as unexpected weakness in the economy, Chiu said.

But China's key priority this year was to stabilize market expectations, and encouraging any yuan depreciation would be viewed as comprehensive monetary easing, he said.

Yuan's drop aligns it with China's cooling economy, easier policy
 

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email