Top Analyst Sees No Easy Win for Yuan Bears as Calm Endures

  • China will limit currency weakness after SDR: Handelsbanken
  • Volatility in the yuan has fallen to a seven-month low

Bears betting that the yuan will soon resume its steep descent look set to be disappointed.

That’s according to Svenska Handelsbanken AB, the currency’s top forecaster in a Bloomberg ranking, who says policy makers will maintain stability in the yuan after its inclusion in the International Monetary Fund’s reserves basket on Saturday. The exchange rate has barely budged against the dollar this quarter after slumping in the previous three months by the most since the nation unified official and market rates at the start of 1994.

"If they can depreciate it slowly, it’s much better for them than depreciating faster with much more attention and with people pointing fingers," said Bjarke Roed-Frederiksen, a Copenhagen-based economist at Handelsbanken, the most accurate yuan forecaster over the last four quarters.

The view contrasts with Royal Bank of Canada and Rabobank, which expect another bout of yuan depreciation after the milestone IMF inclusion as Chinese growth slows and the Federal Reserve prepares to tighten. History suggests global investors have a lot hinging on who’s right, with the yuan’s slide in January and its surprise devaluation 13 months ago snowballing into worldwide market routs. Strategists are predicting China’s currency will decline 1.2 percent to 6.75 a dollar by the end of the year.

Volatility has subsided after earlier wild moves. Swings in the exchange rate over the past month have been the most muted since February, while the currency is trading near its average level for the past two months against the dollar. The yuan was little changed at 6.6721 against the greenback on Wednesday.

Bets on renewed weakness in the currency after the Group of 20 summit hosted by China earlier this month were met with an offshore cash squeeze. The overnight cost to borrow the yuan in Hong Kong jumped to 23.7 percent, raising speculation that China’s central bank intervened to boost the exchange rate -- something the PBOC denied.

As the host of the G-20 meeting that affirmed a pledge to refrain from competitive devaluations this year, China won’t take the lead in weakening its currency, China International Capital Corp. economists Yu Xiangrong and Liang Hong wrote in a note this week. An unstable exchange rate can put China in an "uncertainty trap," damaging investment and consumption, they said.

Some strategists have revised down their bearish expectations. HSBC Holdings Plc upgraded their year-end forecast to 6.8 per dollar from 6.9 this month, citing slowing outflows, while Barclays Plc adjusted its estimate to 6.85 from 7.2.

For a QuickTake explainer on the yuan joining SDR, click here

Currency stability may also be aided by the dollar’s pullback and improving economic data. While the Fed signaled last week a rate hike is still expected this year, it scaled back the projected pace of future increases. China’s new credit, industrial output, fixed-asset investment and retail sales all picked up last month, while private indicators signaled upbeat sentiment in business confidence.

Still, Sue Trinh, RBC’s head of Asia foreign-exchange strategy, is keeping her call for the yuan to end the year at 6.95, the most bearish forecast in a Bloomberg survey. Michael Every, head of Asia-Pacific financial markets research at Rabobank, who sees the yuan at 7.6 in 12 months, says the longer stability is artificially kept, "the harder the elastic will snap eventually."

Kevin Smith, founder of Denver-based hedge fund Crescat Capital, is sticking with his bet against the currency, saying he expects a crisis where the yuan devalues at least 30 percent. The fund has a short position on the yuan through call options it’s continued to roll over, while its equity fund also has short exposure to Chinese stocks, he said.

Such "intervention to deter speculators is an indication that there is much downward pressure on the renminbi," Smith said. "Interest-rates hikes serve only to spur more credit defaults in China’s debt-burdened economy, which is not in the country’s best interest. A devaluation of the yuan would be healthier for the Chinese economy than rate increases. Ultimately, the Chinese authorities know that."

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