Photographer: SeongJoon Cho/Bloomberg

Yuan Forecasters Caught Out by Tumble See No Reason to Fret

  • Analysts expect less than 0.5 percent drop by end of 2016
  • PBOC will step in to calm markets if needed, Westpac says

Forecasters racing to catch up with the yuan’s slide are reluctant to badge the currency a one-way trade.

The speed of the yuan’s recent tumble will slow, and policy makers will step in to overwhelm speculators if bearish bets increase, according to a Bloomberg survey of 21 foreign-exchange traders and analysts. The currency will weaken less than half a percent against the dollar to 6.8 through the rest of the year and hold its ground versus an index of trading partners into 2017, the poll results show.

China’s currency has retreated 2 percent against the greenback since mid-August, a decline that outstrips its shock one-day devaluation last year, without spurring the same global market turmoil. That’s partly because the recent bout of weakness has come as the dollar surged, buoyed by increasing bets that the Federal Reserve will raise borrowing costs. While a limited decline is positive for Chinese exports, investors will be watching for the risk of increased capital outflows spiraling into a vicious depreciation cycle.

“The extent of the yuan’s decline by year-end should be tempered both by investors taking profit in the dollar after a Fed rate hike and by Chinese authorities ensuring the yuan doesn’t become a one-way depreciation bet," said Sean Callow, a senior strategist at Westpac Banking Corp. in Sydney, who predicts the yuan will recover to 6.75 by year-end, from 6.7686 on Wednesday. “We should expect intervention at times to help calm yuan markets."

The yuan will drop to 7 by the end of 2017, according to the median estimate in the Oct. 21-25 survey. The CFETS RMB Index, which the People’s Bank of China uses to track the yuan against 13 currencies, will be kept steady at 94 the rest of this year, the analysts estimated.

The survey’s predictions of relative calm contrasts with a recent plunge in the yuan, which has dropped in all but two trading sessions this month as a gauge of the dollar rose 1.8 percent. The offshore currency, which has been traded in Hong Kong since 2010, fell to a record low this week, fueling speculation that policy makers are tolerating a weaker rate to help exports recover from the biggest decline in seven months.

Market concerns could skyrocket if the yuan approaches 6.83 per dollar, the level at which China pegged the yuan after the 2008 global financial crisis, according to Banco Bilbao Vizcaya Argentaria SA. A crossing of that watershed would be interpreted as a signal that China is seeking competitive devaluation, according to Xia Le, Hong Kong-based chief Asia economist at BBVA.

The derivatives market is not showing much signs of stress, with options prices suggesting just 8.1 percent odds of the yuan dropping beyond 7 per dollar by year-end. One-month implied volatility in the offshore yuan is near a one-year low, indicating investors expect muted swings in the currency.

Outflow Concern

“The yuan won’t likely depreciate too much against the dollar or the trade-weighted basket," said Roy Teo, a senior currency strategist in Singapore at ABN Amro Bank NV. "Heading toward the Fed rate decision in December, I don’t think the PBOC would want to have such negative expectations on the exchange rate, because that would magnify capital outflows."

Data showing an improving economy have also reduced the need for yuan weakness, while the currency’s entry into the International Monetary Fund’s Special Drawing Rights on Oct. 1 is expected to drawn inflows. China will continue to keep the yuan basically stable, PBOC Deputy Governor Yi Gang wrote in an article in the People’s Daily, adding that there’s no basis for a persistent decline. Overseas investors have boosted their holdings of Chinese bonds after policy makers eased access for foreigners.

"Capital outflows may be partially offset by stronger inflows because China’s domestic market is becoming more open to foreign investors," said Ding Wenjie, Hong Kong-based economist at CMB International Securities Ltd., who expects the yuan to trade at 6.8 per dollar by year-end. "Economic stabilization, as observed in recent data, will also strengthen confidence and alleviate capital outflows."

Fourteen of the survey’s 21 respondents expect the PBOC to intervene if yuan declines spark panic. The monetary authority is suspected of regularly stepping into the market to move the exchange rate one way or the other. In the August-September period, policy makers were seen propping up the yuan before a Group of 20 summit and the yuan’s entry into the SDR.

“China will intervene to stabilize the foreign-exchange market if the exchange rate declines to some certain extent or the volatility is too high, which might cause another round of financial instability and have adverse spillover effects,” said BBVA’s Xia.

— With assistance by Tian Chen, Wenwen Zhang, and Ran Li

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