A Yuan Bear Upends Forecast as Handelsbanken Now Sees Stability

  • Swedish bank cuts end-2018 forecast from 7.9 per dollar to 6.4
  • Earlier estimate was influenced by Trump election fallout

Economists have had a dramatic change of heart over the yuan since the start of the year. Back then, the continuing depreciation of China’s currency was viewed as a nailed-on certainty.

Now, amid growing demand that has seen it gain 3.9 percent versus the dollar in the past month, the mood is more upbeat. There’s a growing feeling that the yuan is likely to remain stable for the next couple of years -- the median of analysts’ end-2018 forecasts is 6.8, and for end-2019 it is 6.7.

One analyst who’s had a major rethink is Bjarke Roed-Frederiksen, a senior economist at Sweden’s Svenska Handelsbanken AB -- and his thinking gives an insight into how the currency is seen outside Asia.

At the start of 2017, he was predicting the currency would weaken to 7.9 per dollar at the end of next year. Now he’s forecasting 6.4. The reasons behind the view he held back in January were linked to U.S. President Donald Trump:

  • Trump had recently won the election, and during his campaign he had promised to impose tariffs on Chinese imports.
  • Roed-Frederiksen expected China to retaliate with, among other things, more marked yuan depreciation.
  • The dollar had strengthened in the aftermath of the election, further boosting the case for yuan weakness.

Fast-forward to April and the analyst was revising his end-2018 forecast to 6.8 after the Chinese authorities halted the yuan’s slide against the dollar. This helped to lower market expectations of further depreciation and, coupled with tighter capital curbs, damped capital outflows, he said.

Read more: How the PBOC acted to stem depreciation and capital outflows.

“At the same time, the general dollar strengthening in the late months of 2016 following Trump’s election victory reversed as the initial Trump euphoria started to ebb and the USD started to weaken versus most other currencies,” Copenhagen-based Roed-Frederiksen said by e-mail last week. “That further eased the weakening pressure on the CNY.”

Two other factors influenced him:

  • The authorities finally seemed committed to their pledge to keep the effective exchange rate “basically stable.”
  • Handelsbanken, which has more than 800 branches and operates in Europe, the U.S. and Asia, changed its view on the dollar and penciled in weakness in 2018 to reflect a softer U.S. economy.

“That translates into a strengthening of the CNY versus the USD during 2018,” said Roed-Frederiksen.

A further downward revision for end-2018 by Handelsbanken followed in June, and on Aug. 24 the current 6.4 forecast was announced -- quite a turnround from January.

Note: The yuan was trading at 6.45 on Friday.

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