Yuan Forecasts Cut at Fastest Pace Since January on Fed, Economy

  • Currency trades near five-year low amid surge in dollar
  • Exchange rate to weaken 1.8 percent rest of this year: survey

Analysts are cutting their forecasts for China’s yuan at the fastest pace since January with the currency’s losses accelerating as the economy slows and the U.S. moves closer to raising interest rates.

The exchange rate will weaken 1.8 percent the rest of this year to 6.70 a dollar, according to the median estimate in a Bloomberg survey of analysts including at Credit Suisse Group AG and Mitsubishi UFJ Financial Group Inc. That translates to a forecast cut of 0.6 percent, the most since Jan. 25.

The Chinese currency is approaching a five-year low as traders increase bets that the Federal Reserve will raise borrowing costs as early as this month, with the odds of such a move shooting up to 22 percent from 12 percent at the end of April. Manufacturing gauges in China Wednesday showed economic activity remained subdued in May, after data for the previous month trailed estimates.

“The main source of depreciation stems from the Fed and that the Chinese economy may weaken further,” said Gao Qi, a strategist at Scotiabank in Hong Kong, who predicts the yuan will drop to 6.70 a dollar by end-2016. “But we are less likely to see a replay of the market panic we saw in January.”

Credit Suisse reduced its year-end yuan forecast by the most, predicting a level of 6.74 against the dollar from 6.66 earlier, followed by MUFJ., Mizuho Bank and Norddeutsche Landesbank. The most bearish call is for a level of 7.13 from Rabobank.

The currency fell 0.03 percent to 6.5827 late trading in Shanghai on Thursday. That’s within 0.2 percent of the weakest level since 2011. The onshore yuan fell 1.5 percent in May, the most since August, as a gauge of dollar strength surged 3.7 percent.

The losses come amid signs the nation’s authorities are more comfortable letting the yuan weaken. China’s foreign reserves increased by a combined $17 billion in March and April, a sign that the central bank is spending less on intervention after the currency hoard shrank by $599 billion in the previous 12 months. Estimated capital outflows moderated to about $44 billion in March, the latest figures available, from $144 billion in January.

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