Nordic corporate bank SEB has revised its forecast lower on the Chinese Yuan (CNY) against the U.S dollar to 6.10 by the end of this year, an appreciation of 3.174% over their previous projection of 6.30. By the end of 2019 the bank’s analysts predict the Greenback at CNY5.80 - indicating an almost 5% strengthening on an earlier forecast (6.10).
Today at 10:29 a.m. New York time, the USD/CNY spot rate was quoted on Bloomberg at 6.2888, which was -0.0351 (-0.56%) off from the overnight position. And, were SEB’s end of year forecast for 2018 were to prove to correct it would mean the Yuan would have strengthened by 3%. A week ago on 24 January USD/CNY rate stood at 6.37.
But illustrating how things change, last week ago the bank published its latest Currency Strategy report citing a slower economy for China, but a stronger CNY - albeit at 6.30 by year end. The 12-month consensus on the currency pair was put at between 6.49 and 6.54 according to Bloomberg's survey FX forecasts.
Potential For Further Yuan Growth
Sharing views on the Yuan and why there is potential for strong growth, Sean Yokota, Head of Asia Strategy at SEB, said: “China’s currency strength has more room to grow. This year CNY is off to a stronger start than 2017, appreciating by 2.6% versus the US dollar - from 6.51 to 6.34 - or over 30% annualized.”
Historically, CNY only moves 6% to 7% in a year. And, if one looks back to when the Chinese currency moved the most - in 2016 - a decline of 6.8% was witnessed.
“We clearly saw that the authorities [central bank] disliked the speed and stepped in. Is it different this time since it’s moving in China’s favor?” the strategist based in Singapore pointed out.
No Major Policy Shift
While SEB does not think it is a major policy shift, Yokota noted that: “CNY’s trade-weighted value (CFETS RMB Index or NEER (Nominal Effective Exchange Rate) is stable despite the larger up and down moves in USD/CNY.”
The CFETS RMB Index mainly refers to CFETS (China Foreign Exchange Trade System) currency basket, including CNY versus FX currency pair listed on CFETS.
China has lost little export competitiveness to its neighbors in APAC region from the recent CNY move.
It appears that The People’s Bank of China (PBoC) is letting CNY strengthen in line with the general US dollar weakness and what was described as being in a “similar magnitude to strength in the euro, Japanese yen and Korean won,” SEB said.
Slowing Chinese Economy
According to SEB’s latest Currency Strategy report from this January, it was pointed out that China’s economy will slow to 6.6% in 2018 - down from 6.9% in 2017.
The report edited by Carl Hammer, Head of Global Macro & FX Research at SEB in Stockholm, noted in relation to China: “Government policy has switched to reduce risk. President Xi regards rising debt as hazardous to political stability. The healthier global growth and export environment provide room for domestic slowdown and de-risking without hitting total growth significantly.”
While total debt growth slowed in 2016, SEB said it expected a further slowdown that will reduce debt as percent of GDP (i.e. deleveraging).
A strong Chinese Yuan?
SEB’s Yokota commenting in relation to the implications of strong Chinese currency indicated it was threefold. “Firstly, the capital account will revert to more liberalization. As CNY strengthens, the authorities will be less worried about capital outflows,” he noted.
He added: “Secondly, CNY’s status as a reserve currency will increase. USD will remain the dominant reserve currency but CNY’s “market share” can increase. CNY as a reserve currency can be more attractive with the loss in US dollar’s value as well as the Trump administration sending mixed signals on the preference for a strong Greenback.”
Thirdly, China’s foreign exchange (FX) reserves “will not increase” according Yokota.
As China allows the currency to strengthen in lieu of U.S. dollar weakness, the strategist asserted that the “PBoC does not have to intervene and FX reserves won’t rise like we saw from 2005 to 2014. Lastly, U.S. trade tensions will not ease.”
The PBoC may be allowing the Yuan to strengthen to prevent U.S. trade tensions from escalating. “However, this time the US pressure appears politically driven and China will not back down,” Yokota ventured.
Hiking Rates
In terms of raising interest rates, SEB’s recent currency report contended that the central bank (PBoC) will “keep interest rates elevated and hike starting in the second half of 2018 to facilitate de-risking and deleveraging.”
It added: “That is negative for growth but supports the currency. PBoC has been one of the few who have pushed up rates to keep up with the U.S. Federal Reserve.” As for the rest of Asia, Malaysia has signalled for a hike in the early part of 2018 - and would follow Korea raising rates late last year.
“We think Singapore will follow in April. In addition to higher rates, Asian central banks will allow for currency strength to fend off the rise in inflation pressures,” SEB said.
