MNI: Yuan Could Rally To 6.5 On China Recovery, Fed Rate Peak

The yuan could rally to 6.5 against the U.S. dollar next year as China’s economic rebound gathers pace and the Federal Reserve approaches the peak of its tightening cycle, advisers and economists told MNI.

Any advance by the yuan to its strongest level since April is not expected to be sustained, with the currency expected to trade in a wide band around 6.8 amid a tug-of-war between a recovery in domestic demand and a slowdown in exports as external demand is sapped by aggressive rate hikes by global central banks.

The yuan is expected end this year around 6.95 - or 6.85 in the event the dollar sharply weakens - after sliding to a 15-year low of around 7.3 in October.

The yuan is likely to rally against the dollar in 2023 but may fluctuate in a range between 6.5 and 7.2, said Lian Ping, chief economist at Zhixin Investment. He said the dollar will lose steam if the Fed stops tightening in the first quarter and speculation turns to a dovish change in policy, and as China’s economy recovers as Covid measures are relaxed and policy stimulus takes effect. However, he said a sharp rally would not be acceptable given the soft outlook for exports. (See MNI: China's Local Governments Pile On Debt In Growth Hunt)

Lian predicted the use of the yuan to settle oil trades with Gulf nations will boost the currency in the medium term. President Xi Jinping last week visited Saudi Arabia and called on Gulf nations to use the yuan as a settlement currency.

The yuan may remain volatile in the short term, but it will stabilise and strengthen against the dollar if the Fed slows its rate hikes, Chinese monetary policy remains prudent, China’s economy rebounds and market sentiment improves, said Sheng Songcheng, former head of the statistics and analysis department at the People’s Bank of China.

EXPORTERS DUMP DOLLARS

Helping support the yuan’s recent rally have been dollar sales by Chinese exporters, who have exchanged greenbacks for yuan on expectations the dollar has peaked, said Lian.

Exporters held dollars as the yuan weakened from 6.3 to 7.3 this year, but the fast-paced rally and increased export payments at year-end have encouraged more dollar selling, noted analysts at China International Capital Corporation.

The surplus of goods and services trade in the first 10 months totaled USD494.5 billion, while the surplus of foreign exchange settlements was just USD127.6 billion, according to State Administration of Foreign Exchange data. The USD366.9 billion gap is the second largest over that timeframe since 2015.

The yuan rally since November may ease after the Fed’s December rate hike as the dollar may go up, said Tan Yaling, head of the China Foreign Investment Research Institute. She forecasts the yuan will end 2022 between 6.98 to 7.0, though there is a chance the yuan could weaken above 7 this month.

Elevated exchange rate volatility at year-end will rattle importers and exporters, and is not in line with economic fundamentals, Tan said. She forecasts the yuan may endure another year of volatility in 2023, possibly trading between 6.6 and 7.4 against the dollar.

DOLLAR PEAK

Some economists calculate the dollar is peaking, and that will be decisive in determining the yuan’s direction in 2023.

The U.S. Dollar Index is unlikely to reach September’s 20-year high of 114, and a yuan range of 6.7-6.8 could be a level at which exports and importers benefit, said Shen Jianguang, chief economist of JD.com. Morgan Stanley predicts the yuan will rise 5%-6% against dollar next year and appreciate another 3%-4% in 2024.