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MNI: China’s Yuan Draws Support From Uncertainty, For Now

SINGAPORE (MNI)

The yuan could strengthen to 6.1 against the dollar if further pandemic disruption drives exports.

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A stronger Chinese yuan against the dollar is on the cards near term if the Omicron virus rocks global supply chains, policy advisors and FX experts told MNI, despite expectations the currency will lose steam in 2022 on a likely Fed rate hike and narrower trade surplus.

China’s trade outlook should be supported by current pandemic uncertainty as that deepens dependency on Chinese products, said Yu Miaojie, deputy dean of the National School of Development at Peking University.

Yu, a participant at a recent economy advisory meeting with Premier Li Keqiang, noted robust exports and a resilient economy despite weaker than expected Q3 GDP could prop up the yuan to 6.1 against the dollar by next year-end.

The 6.1 level would be strongest since 2015 when the People’s Bank of China surprisingly devalued the yuan by nearly 2%. A volatility band for the yuan against the dollar next year is seen from 6.1 to 6.7, according to sources who spoke to MNI.

The yuan rallied this week after Omicron virus hit global markets last weekend. USDCNY fell by 0.27% so far this week, approaching the lowest level at 6.3565 in June. The PBOC CNY fixing price surged by 1.81% at the same time, the biggest weekly jump this year, while the dollar index increased by 0.1%.

PRESSURE ON EXPORTEERS

However, FX experts said the currency would likely trend weaker in 2022 as a stronger yuan has economic and policy implications

Tan Yaling, head of the China Forex Investment Research Institute, said the PBOC has clearly signalled it is watching the yuan rally closely and the over 11% rally from 7.1765 in May 2020 has been too fast and pressured Chinese exporters.

That will be a big factor for exports to ease in 2022 as margins are squeezed for many exporters, Tan said.

The PBOC is expected to make sure the currency trades with flexibility and not on a straight path, see: MNI INTERVIEW: PBOC Would Curb One-Way Bets On Yuan-Guan Tao.

Yu’s view anchored a bullish trend overall with other sources MNI spoke to in a range of 6.35 to a top of 6.7 to the dollar, which compares to an October informal poll by MNI of a level around 6.40 before weakness sets in in Q1.

Liang Si, researcher at the Research Institute of Bank of China, told MNI USDCNY would end the 2021 at 6.38, and next year at 6.45 by the year-end, as the Fed and global economic recovery are the two decisive factors for yuan performance.

According to an outlook note issued by the BOC , exports would rise about 4.5% y/y next year, compared with a jump of 32.3% y/y in the first 10 months this year.

Liang also said that a possible narrowing interest spread between China and the U.S. could bring some pressure to the yuan.

A forex trader at a major bank agreed that the current about 140bp spread between the 10-year CGB and U.S treasury would further narrow on the policy divergence of the two big countries, noting a yuan range of 6.35 to 6.7 against the dollar was the in-house expectation for 2022.

The trader said the CFETS RMB index, which measures the yuan’s strength against a basket of currencies, bears watching as it hit the strongest in seven years at 102.7 near the end of November.