Yuan Watchers Lower Forecasts as Trump Victory Raises Risks

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  • Currency may weaken to 7 per dollar early next year: survey
  • Policy makers may refrain from intervention, respondents say

The yuan’s forecasters are turning more bearish.

The Chinese currency will weaken to 7 against the greenback -- a level unseen since before the global financial crisis -- in the first half of next year, according to 14 of 16 analysts and traders surveyed by Bloomberg this week. Ten said policy makers may refrain from propping up the yuan, with Royal Bank of Scotland Group Plc citing the nation’s shrinking foreign-exchange reserves. Mizuho Securities Asia Ltd. said the level could be breached this year, while Oversea-Chinese Banking Corp. sees it happening possibly in January.

The views are a sharp turnaround from a similar poll conducted just three weeks ago, when respondents said China would limit excessive yuan declines and that the currency would hold its ground against an index of trading partners. The situation has changed since then, with Donald Trump’s surprise victory in the U.S. presidential election prompting a wave of banks to lower their forecasts for the currency. The Republican has threatened to brand China a currency manipulator and slap tariffs on the nation’s exports.

“The psychological level of 7 is important," said Eddie Cheung, a foreign-exchange strategist at Standard Chartered Plc in Hong Kong. “A break of that level this year would create self-reinforcing downward pressures that will feed into sharper depreciation in early 2017. A breach mid-next year amid a dollar rally could still hurt sentiment, but would be less negative."

Standard Chartered Wednesday joined at least four other banks in lowering its forecasts for the yuan, predicting a year-end level of 6.9, compared with 6.75 earlier. The odds of Fed tightening this year have shot up to 94 percent amid speculation the U.S. monetary authority will move to cap inflation as a Trump-led administration steps up spending. This would reduce the allure of emerging-market assets.

The currency fell to 6.8798 against the greenback in Shanghai on Wednesday, the weakest level since December 2008 and beyond a separate Bloomberg survey’s year-end median estimate of 6.8. It rose 0.06 percent to 6.8717 as of 4:31 p.m. local time, while the offshore yuan climbed 0.1 percent. The central bank has lowered its daily reference rate by 1.7 percent in the past 10 days. A gauge of dollar strength posted the biggest four-day rally in seven years following Trump’s win.

“The pressure for the yuan to decline could be stronger next year as Trump’s policies could lead to a dollar rally and amid concerns about China-U.S. trade relations," said Harrison Hu, chief greater China economist at Royal Bank of Scotland in Singapore. "The People’s Bank of China can curb high volatility with stronger fixings and intervention, but it won’t do so unless outflows surge, as such measures could add great pressures to foreign reserves."

A record $44.7 billion left China in September in yuan payments, while the nation’s foreign-exchange stockpile shrank the most since January last month. The nation’s holdings of U.S. Treasuries declined to $1.16 trillion in September, the lowest level in four years, according to Treasury Department data released Wednesday in Washington. Chinese officials have taken a series of steps to plug capital control loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country. UnionPay Co. late last month limited mainlanders from using its cards to buy insurance in Hong Kong.

Banks Revise

HSBC Holdings Plc, UBS Group AG and Australia & New Zealand Banking Group Ltd. lowered their yuan forecasts on Tuesday, predicting that the currency will end this year at 6.9 per dollar, compared with earlier estimates of 6.8 for the first two lenders and 6.75 for the third. Standard Chartered expects the yuan to breach 7 in the second quarter of next year.

“The worst-case scenario would be that the yuan would be under huge depreciation pressures and the market oversells the currency, which would lead to a dramatic drop in the foreign reserves," said Shen Fangjia, head of foreign-exchange trading at China Shipping Finance Co. "If this happens, the PBOC will be forced to give up on intervention and impose comprehensive capital curbs."