The Chinese yuan will slide to a multi-year low in the coming 12 months based on expectations of more monetary policy easing, continued outflows of capital and further pressure from a relatively strong dollar, according to a Reuters poll.
But the survey of over 50 currency strategists taken this week suggested a sharp depreciation of the yuan, at least by June, was unlikely.
“Our base case scenario is for a gradual and controlled depreciation in the yuan by end-2016,” said Jason Daw, head of Asian FX strategy at Societe Generale.
“We think the Chinese government can probably get capital outflows largely under control, which would then require less selling of foreign exchange reserves to manage the currency.”
The yuan, also known as the renminbi, has lost over 1 per cent so far this year and is down almost 6 per cent since early August, when the People’s Bank of China (PBoC) devalued it.
Since then, the yuan’s fortunes have been among the main sources of financial market speculation and turmoil, compounded by growing concerns about the underlying health of China’s slowing economy.
While no one can predict with any real conviction what exactly Beijing’s next moves will be, foreign exchange experts both inside and outside China expect the yuan to weaken.
They forecast the yuan to trade around 6.60 a dollar by the end of February and then fall steadily to 6.72 by end-July and further to 6.80 by end-January next year.
Although that 12-month consensus is just about 4 per cent lower than Friday’s trading rate of 6.56, it is the weakest median since comparable polling on the currency began three years ago.
If the forecast is proved correct, it would mark the lowest level for the yuan since early September 2010.
Almost a fifth of the respondents in the survey predicted the yuan would breach 7.00 to the dollar in a year and the lowest forecast was 8.00.
But the outlook for the dollar itself is uncertain, due to doubts over the Federal Reserve’s next interest rate hike.
No big devaluation ahead
A strong majority of analysts who answered an extra question in the survey, 28 of 36, said the PBoC was unlikely to devalue the yuan sharply before mid-year.
“The potential cost of a sharp devaluation, in terms of mounting depreciation pressure and capital flight, could be tremendous. Unless they lose the ability to intervene, which is not completely impossible, they wouldn’t go for devaluation,” said Amy Zhuang, analyst at Nordea.
Societe Generale estimates about $657 billion of investor money has left China since mid-2014. The PBoC would be unable to defend the yuan for more than two to three quarters if that rate of capital flight continues, they argue.
China currently holds $3.33 trillion in currency reserves, about the size of the UK economy. Its holdings are projected to have fallen by over $100 billion in January, according to a Reuters poll, as the PBoC stepped into currency markets to buy the yuan in the face of relentless selling by investors.
The PBoC has fixed higher mid-points for the yuan in recent days despite the currency steadily trading lower to calm jittery investors concerned of its intentions.
Beijing has also imposed measured capital controls, such as imposing limits on cross-border flows from yuan-dominated capital pools, to stabilise the exchange rate.
The poll also predicted the South Korean won would lose about 2 per cent to trade around 1,215 per dollar in the next twelve months from 1,195 on Friday, dragged by the Chinese yuan.
The rupee is forecast to fall only slightly over the coming year on expectations that the Reserve Bank of India (RBI) will cut interest rates at least once more this year.