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Yuan bears wake slumber

2014-12-03 15:12:38Source:BloombergAuthor:

Strategists forecast a weakened renminbi as country seeks wider global acceptance, reports Bloomberg.

Efforts by China's central bank to signal it will let the yuan strengthen, even as it grapples with a slowing economy, are being lost on currency strategists.

While the People's Bank of China raised the yuan's reference rate to an eight-month high last week, some of the biggest voices in foreign exchange markets said it will decline after policymakers cut interest rates for the first time since 2012.

Mitul Kotecha, Barclays Plc's Singapore-based head of Asia currency strategy, said the yuan will weaken 2.3 percent by September 2015. UBS AG also predicts depreciation.

As China seeks to open its capital markets and boost yuan usage globally via trading hubs from Australia to Canada, policymakers will be mindful of avoiding being seen as implementing monetary easing programs that debase the exchange rate in the manner of Japan and the eurozone. The yuan is the only emerging market currency to have strengthened versus the dollar since mid-year, after a 2.4 percent retreat in the first half.

"My expectation is that the PBOC might be inclined to err on the side of a weaker currency," said Jason Daw, head of Asian foreign exchange strategy at Societe Generale SA in Singapore.

"A small decline in the value of the yuan, similar to what occurred in the first half, is not incompatible with continued internationalization efforts."

The PBOC increased the currency's reference rate to 6.1320 per dollar on Nov 27, the strongest level since March, after it delivered a 40 basis points reduction in the benchmark lending rate. It has raised the fixing by 0.3 percent since the end of June after cutting it by 0.9 percent in the first half. The currency has advanced 0.9 percent since then, compared with declines of 14 percent for the yen and 9 percent for the euro.

The yuan weakened in each of the first four months of 2014, its longest losing streak since China ended a dollar peg in 2005, as policymakers engineered a retreat to curb speculation the currency was a one-way bet after gains in all but one of the previous 16 quarters.

Since June, Barclays' inflation-adjusted exchange rate for the yuan has rallied 8.6 percent against the currencies of China's major trade partners.

"China is losing the currency wars, steadily increasing the risk of another engineered bout of yuan weakness," said Richard Iley, the Hong Kong-based chief Asia economist at BNP Paribas SA.

"With the yen and the euro weakness expected to mount, the pressure to loosen policy not just via rates but also foreign exchange is also likely to steadily climb."

The yuan dropped below the PBOC's fixing last week for the first time since August and ended on Monday at a 0.2 percent discount, within the 2 percent limit of its trading band.

PBOC Deputy Governor Hu Xiaolian said on Nov 27 in Beijing that the central bank is pressing ahead with exchange rate liberalization and has basically withdrawn from regular intervention in the currency market.

The yuan's implied one-month volatility, a gauge of expected price swings, has recorded the second-biggest jump in Asia since Nov 21, when the PBOC cut its one-year lending rate to 5.6 percent and the one-year deposit rate by 0.25 percentage point to 2.75 percent.

Malaysia's ringgit had the largest increase in volatility in that time and slid 2 percent versus the dollar, the region's worst performance.

HSBC Holdings Plc forecast in a research note last week there will be two more reductions in benchmark interest rates by mid-2015, each of 25 basis points, and banks' reserve requirement ratios will be lowered by 150 basis points cumulatively next year.

Lower interest rates and capital outflows will weaken the yuan to 6.35 per dollar in 2015, Wang Tao, the China economist at UBS, wrote in a Nov 26 report.

Barclays and UBS rank among the world's four biggest foreign exchange dealers, a survey by Euromoney Institutional Investor Plc showed in May.

Citigroup Inc, the largest forex dealer, forecast as of Nov 21 that the yuan would weaken to 6.23 by the middle of 2015.

Deutsche Bank AG, ranked second, was reviewing its yuan projections, said Linan Liu, a Hong Kong-based rates and currency strategist at the bank, on Monday.

China's decision to cut borrowing costs was triggered by rising real interest rates, which climbed to the highest level since 2009 last month, and does not signal a change in the central bank's prudent monetary policy, Hu Xiaolian said on Nov 27.

The yuan's globalization requires a stable or even slightly strong exchange rate and devaluation is unlikely, Financial News reported on Nov 26. The newspaper is a publication of the central bank.

"We do not believe that the rates cut implies that the PBOC would be less tolerant of yuan appreciation and the fixings last week show as much," said Sacha Tihanyi, a Hong Kong-based strategist at Scotiabank, on Monday. The yuan will strengthen to 6.10 per dollar by the year-end and climb to 5.98 by the end of 2015, according to Tihanyi.

Nomura Holdings Plc has bolstered its bets on yuan gains through the options market, according to a Nov 25 report by Craig Chan, the bank's head of Asian currency strategy. The chances of more rates cuts, which would effectively reduce the yield differential with the dollar, could cause depreciation in the second quarter as a sharp economic slowdown is likely, he said.

China's official Purchasing Managers Index fell to an eight-month low in November. The world's second-largest economy will expand 7 percent in 2015, less than this year's estimate of 7.4 percent and the slowest pace since 1990, according to median estimates in Bloomberg surveys.

"The rates cut is an inexorable step toward a weaker currency," said Michael Every, the Hong Kong-based head of Asia Pacific financial markets research at Rabobank International, on Nov 24. "It is a reflection of economic weakness," he said, predicting the yuan will weaken 3.9 percent to 6.40 per dollar before the end of this month.

Some technical gauges are also pointing to a bearish outlook for the yuan. The moving-average convergence divergence, or MACD gauge, has risen higher than its signal line and is above zero, a bullish signal for the dollar versus the yuan.