Faced with trade war risk, yuan to manage only modest rise: Reuters poll

By Vivek Mishra

BENGALURU (Reuters) - The Chinese yuan will trim only some of its recent losses against the dollar over the coming year, with the People's Bank of China increasingly likely to intervene to support the currency against a still-rampant dollar, a Reuters poll found.

Trading in the partly-managed yuan, which has lost about 5 percent since the start of the year, was volatile this week amid threats that U.S. President Donald Trump could impose additional tariffs on Chinese goods worth $200 billion.

But in the last few weeks, China's central bank stepped in to support the currency and avoid heavy capital outflows, strengthening the yuan by about 1.5 percent against the greenback from its weakest level this year on August 15.

 

"Chinese authorities, having allowed the yuan to weaken in response to the trade escalation, have now signaled that they are unwilling to let the currency slide further beyond the 6.95-7.00 level last seen in late 2016," noted Khoon Goh, Head of Asia Research at ANZ.

"In the past, the authorities have been successful in eventually turning yuan weakness around. Trade tension is unresolved and the PBoC is likely to further support growth. But even with this, the signal the PBoC is sending suggests the yuan could be due for a rebound in the near-term."

The yuan is expected to gain 1 percent to 6.77 per dollar in a year, according to the poll of over 50 foreign exchange strategists taken Sept 3-5 from around 6.84 late on Wednesday.

However, 18 of 40 common contributors have now revised their forecasts to a weaker yuan compared with a poll taken last month, citing the risk that global trade tensions worsen.

Thirteen of them kept their projections unchanged and the remaining 9 revised them to reflect a stronger currency.

Nine strategists see the yuan weakening to 7 to the dollar or higher at some point over the 12-month period, two more than in the poll taken one month ago.

The PBoC has taken multiple steps to arrest the sharply-depreciating yuan by making the currency expensive for investors to bet on, helping to ease market speculation in a bid to avoid a repeat of the shock devaluation of the renminbi seen in 2015.

One of the measures the PBoC undertook to shore up the yuan was to reintroduce the 'counter-cyclical factor' to its daily fixing mechanism at the end of August. This would allow investors to trade 2 percent above or below the daily reference rate set by the central bank.

Following this, bearish bets on the renminbi were sharply reduced, a separate Reuters survey showed.

"We are fairly bearish on the U.S. dollar over the near-term and see weakness in the yuan as a multi-reflection of dollar strength," said Erik Nelson, currency strategist at Wells Fargo and the top forecaster for Asian currencies in 2017.

"In the very near-term the Chinese currency is out of the woods, but I think by early next year we will see a decisive recovery in the yuan and decisive resumption of greenback weakness."

But the wider Reuters foreign exchange poll found the U.S. dollar, which has had its best run so far this year since 2015, will hold on to the gains until December and not beyond.

Still, the 12-month forecast for the yuan was the most pessimistic median in Reuters polls conducted this year.

Several currency strategists said renewed pressure on the yuan is inevitable as the Sino-U.S. trade war escalates, threatening to put more pressure on China's already cooling economy.

Seventeen of 50 participants said the yuan will weaken below the current level of 6.84 in a year with the most pessimistic forecast expecting it to fall to 7.30, a level not seen since last financial crisis.

Policy tightening from the U.S. Federal Reserve and rising Treasury yields could affect the yuan's stability.

"The prospect of a new trade war could hurt China's export competitiveness and the PBoC is loosening monetary policy to cope with credit contraction. So I don't deny for a moment that yuan will face depreciation pressure," said Li Yishuang, FX analyst at China Securities in Beijing.

"The chance of yuan falling below 7 in the short-term is low, but in the long-term, the movement will depend on dollar index."

(Polling by Khushboo Mittal and Vivek Mishra; Editing by Ross Finley and Matthew Mpoke Bigg)