ANZ: China's Currency Still Has Some Way To Fall

A sea of red of global stock markets – Getty/ChinaFotoPress

The widening of the Chinese yuan trading band from 1% to 2% and the default yesterday of yet another Chinese company’s bonds have conspired to weaken the USDCNY once again.

It is a situation that has prompted the ANZ’s FX Strategy team to increase their year-end USDCNY forecast from 5.98 to 6.08. That is below the current spot rate, meaning the ANZ believes that this recent yuan weakness won’t last.

Actually the ANZ says that while this weakness may overshoot to 6.2 (higher USDCNY equates to a weaker Chinese yuan), it will reverse in the second half of 2014 because “It is not in PBoC’s interests to have a sustained depreciation in the currency, as this will increase financial stability risks.”

This will be of key import to Premier Li and President Xi as they seek to balance out their reformist agenda with maintaining a steady course for the Chinese economy so that the reforms can take hold.

The ANZ argues the current move is excessive relative to inflation and more reflective of a move to price in recent weak Chinese economic data. As a result, ANZ are forecasting an end point for USDCNY of 6.15 at the end of Q2 – against a current spot of 6.19 – and then an appreciation in H2 2014.

From an Australian perspective, the moves in the USDCNY and the capital flows that have been occurring over the past month or so are important to the long-term stability of views on China and the ability of Li and Xi to deliver China into a more stable and broader based economic environment in the years ahead.

But the outcome is far from certain and the ANZ is worried that like “most of 2012 and in mid-2013”, hot money might continue to flow out.

While this is happening, expect the Aussie dollar to remain well-supported as a leveraged bet to China without the risks associated with slower growth and reforms.

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