January 9, 2019 / 2:11 AM / 2 months ago

Reuters poll: China's yuan to break 7 per dollar in six months - FX strategists

BENGALURU (Reuters) - China’s yuan is still expected to breach the key 7-per-dollar mark within six months as a dimming economic growth outlook is likely to push the central bank toward easier monetary policy this year, a Reuters poll found.

FILE PHOTO: Chinese 100 yuan banknotes are seen in a counting machine while a clerk counts them at a branch of a commercial bank in Beijing, China, in this March 30, 2016 file picture. REUTERS/Kim Kyung-Hoon/File Photo

The number of analysts predicting the yuan will weaken to 7 per dollar or beyond at any time during the polling horizon increased in the latest poll from previous months and was the highest since a July 2017 survey.

Although the yuan CNY=CFXS fell about 6 percent last year, with most losses coming after June when the U.S.-China trade war escalated, it still did not crack the 7-per-dollar rate.

The managed currency, also known as the renminbi, went through wild gyrations last year, with the spread between its high and low the widest in almost three decades.

For the second month running, a strong majority of analysts who answered an extra question said the yuan would weaken to 7 per dollar within six months, despite a widely-held view the Chinese authorities will step in to defend it at that key level.

That view is largely driven by expectations the Chinese economy will lose further momentum in 2019 amid softening domestic and export demand, prompting the central bank to take more steps to reduce the risk of a sharper slowdown.

However, median estimates in the wider Jan. 2-8 poll of more than 70 foreign exchange strategists showed the yuan will only weaken about 1.5 percent to 6.95 per dollar by end-June from about 6.85 on Tuesday. It is then forecast to end the year at 6.89 per dollar.

Much will also depend on how long it takes China to stabilize its cooling economy and whether Washington and Beijing end their trade war.

“Looking at the Chinese fundamentals, the economy is slowing and the central bank is easing monetary policy, with a lot of uncertainties over the next steps for the trade dispute between the U.S. and China,” said Erik Nelson, currency strategist at Wells Fargo.

“All these point to further weakness in the Chinese currency,” he added.

U.S. Commerce Secretary Wilbur Ross said on Monday the United States and China could reach a trade deal that “we can live with” as dozens of officials from the world’s two largest economies held talks in a bid to end a trade dispute that roiled global markets last year.

Despite optimism around the talks in Beijing, some respondents warned that the U.S.-China relationship remained on shaky ground and that tension could flare up again soon.

“Until the outcome in the latest U.S.-China trade truce proves as substantial as the working level discussions, the risk remains for more tariffs on each other’s goods. If the U.S. reinstates the decision to lift the tariff rate on $200 billion worth of China’s goods to 25 percent from 10 percent, the yuan could depreciate to 7.30 per dollar,” noted Philip Wee, currency strategist at DBS Bank.

“Under the worst-case scenario, U.S. will impose a 25 percent tariff on the remainder of China’s goods. This could pressure the yuan to 8 per dollar with negative spill-over effects into other Asian currencies.”

But some respondents said the yuan would never break the 7-per-dollar threshold - not reached since the global financial crisis - on expectations that those who manage it will step in to defend it.

“In reality though, the Chinese authorities have employed various methods to stem the depreciation as the currency approached that level, including resuming FX intervention in September and October, after a break of more than 18 months,” said Khoon Goh, head of Asia research at ANZ.

“Such action shows that there is strong policy commitment to prevent the yuan from weakening too much, with 7 being a key red line.”

Analysis by Sujith Pai; Polling by Khushboo Mittal and Anisha Sheth; Editing by Jacqueline Wong

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