After a rough start to 2016, the Chinese renminbi has found its footing in recent weeks, rallying against the US dollar after hitting a fresh five-year low of 6.5945 on January 7.
Recent strength in China’s currency, along with a wave of monetary policy easing and a pull back in expectations for US rate increases in the year ahead, has helped to underpin risk assets, creating a sense of calm across financial markets after a tumultuous start to the year.
While some see the rally as the start of a longer lasting trend, Irene Cheung, senior FX strategist at the ANZ, doesn’t think that the renminbi’s rally will last, offering three reasons as to why she believes the offshore traded renminbi, or CNH, will weaken further in the period ahead.
Here’s the reasoning behind her call.
First, we think that the market is under-pricing potential tightening by the US Federal Reserve. Currently, the market is fully pricing in one quarter-point rate hike by the Fed only in early 2017, whereas our central scenario is for two-quarter point hikes this year.
Second, despite trying hard not to put downward pressure on the RMB, the PBoC’s monetary easing will remain a dampener to the currency. We expect a further 150bp cut in the RRR coupled with 50bps of cuts in the one-year lending rate this year.
Third, it appears that the PBoC is guiding the RMB index (CFETS) weaker at a gradual pace. To date in March 2016, the RMB index has eased 1.6%, now at the weakest point since November 2014. While there could be a period of consolidation (or even a modest upward retracement) in the near term, we see the risk that the PBoC will continue to guide the index on a broadly easing trend in the coming months until the Chinese economy stabilises, or rebounds.
Cheung forecasts the USD/CNH to trade at 6.65 by the end of 2016, up from it’s present trading level of 6.4721.
The chart below, supplied by ANZ, puts that forecast into visual form.
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