TD SECURITIES: China's central bank is 'hamstrung' and the Chinese yuan will continue to fall

(Barcroft Media via Getty Images)
  • TD Securities thinks weakness in China’s currency will see the USD/CNY rise to 7.10 against the USD by year-end.
  • Many analysts are now speculating whether the yuan will fall below the key benchmark of 7.
  • Analyst Sacha Tihanyi said Chinese policy makers will have no choice but to “manage the pace of depreciation” in the currency.

Further weakness in China’s currency, the yuan (CNY), rattled global markets on Friday.

And TD Securities analyst Sacha Tihanyi said the yuan will continue to fall below the key benchmark of 7 against the US dollar.

The decisions of Chinese policy makers have come into focus this year as the economy shows signs of a slowdown.

It comes after authorities began the year with their sights set on curbing the buildup of excess debt in China’s financial system.

More recently though, top officials have taken measures to free up some liquidity in order to maintain economic momentum.

However, it’s a tricky balancing act.

“The People’s Bank of China remains hamstrung however considering that each monetary lever it has at its disposal comes with certain costs and risks,” Tihanyi said.

For example, China’s central bank could boost activity by cutting interest rates, but such a move would put extra downward pressure on the yuan.

Instead, the PBoC has reduce the reserve amount of capital domestic banks have to hold to lend out money — a move which effectively pumps more cash into the financial system.

And it’s “this macro friction remains key in our view to a still depreciating Chinese yuan”, Tihanyi said.

In addition, TD Securities thinks the pending drag on China’s currency from Trump’s trade war hasn’t been priced in by markets.

That may be partly because China’s trade balance with the US has continued to increase as local exporters try and make hay while the sun shines — a situation that’s unlikely to last.

Since the yuan started to depreciate in June, “the demand for spot CNY selling has now hit a new one-year high”, Tihanyi said.

“This suggests that CNY is already highly sensitized to the risk of a confidence loss in the currency… a weakening in trade data would likely catalyze this threat.

“We continue to see 7.10 in USD/CNY by year-end, and weakness into the new year for the renminbi, as the PBoC manages the pace of depreciation, but defends no level outright.”

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