The Chinese yuan hit a near eight-year low against the US dollar on Tuesday, and ANZ thinks that there’s likely to be further weakness in the year ahead.
“CNY reached the weakest level against the USD since December 2008,” said Khoon Goh, head of Asia research at the bank.
“While the authorities may act to limit the volatility of the moves, it is unlikely that they will defend any particular level.
“Uncertainty over whether US President-elect Trump will label China a currency manipulator is also weighing on the yuan,” he says.
Given the recent move — the US dollar has strengthened 5.6% against the yuan so far this year — along with heightened levels of uncertainty that a Donald Trump presidency may bring, Goh believes the yuan will continue to slide in 2017, taking the USD/CNY back above the 7.0000 level for the first time since May 2008.
“We see scope for further dollar strength, and are downgrading our CNY forecasts, he says. “We now forecast USD/CNY to end the year at 6.90 and 7.10 by the end of 2017.”
Should Goh’s forecast be on the money, it will take the gain for the US dollar against the yuan since early 2014 to 17.5%, a significant move in anyone’s language.
Given the potential for increased capital outflows from China as a result of yuan weakness — something that rattled financial markets earlier this year when it occurred — Goh says that authorities “will want to ensure that this does not cause a sharp increase in capital outflow pressures.”
Although he predicts further weakness against the US dollar, whether that permeates to declines against other major currency pairs appears more uncertain, with the yuan broadly stable on a trade-weighed basis over recent months.
“The key driver behind the CNY moves (in October) has been a stronger USD,” he says.
“While CNY has weakened during this period of USD strength, the RMB Index has stayed very stable. In fact, the RMB Index has remained within a 93.7-94.7 range since August, halting the declining trend that started in November last year.
“Hence, the decline in the CNY has kept pace with the depreciation seen in the other currencies in the RMB basket,” he adds.
The fact that the yuan has been stable against other major currencies recently, along with no imminent signs of capital outflows and a far stronger economy than what was the case earlier this year, may help to explain why markets have, as yet, have taken the weakness in the yuan against the US dollar in their stride.
Whether that remains the case remains the great unanswered question.
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