MNI: Yuan Seen Boosted In Q4 If U.S. Enters Recession-Analysts

The Chinese yuan could be buoyed against the dollar in the fourth quarter by economic recovery at home just as the U.S. potentially heads into recession, allowing it to strengthen against other emerging-market currencies, market analysts said.

Despite a likely uptick in yuan volatility as the dollar index rises as high as 110 in Q3, the currency could also find support in the shorter term from a much-discussed potential rollback of U.S. tariffs on some goods, said Li Chao, chief economist at Zheshang Securities. While the exchange rate could ease to 6.8 or 6.9 against the greenback from about 6.7 now, it could rebound to as high as 6.3 by the end of the year if the dollar index retraces close to 100 by year-end, he said.

Li Liuyang, analyst at China International Capital Corp, said the yuan could be volatile in the weeks ahead as the Federal Reserve continues in hawkish mode that would push the dollar index up even as fears grow of U.S. recession. USDCNY would trade in a range of 6.60 to 6.80 this month, he said.

While Sino-U.S. relations will be crucial for the currency, any approach to the key level of 7 may be highly watched by the People’s Bank of China, Sun Binbin, analyst at Tianfeng Securities, said in a note.

CAPITAL FLOWS

The yuan should also receive support from improving capital flows in H2, analysts said, though they pointed to the spread of new Covid-19 variants as the biggest source of uncertainty for the currency.

The yield spread between benchmark Chinese and U.S. Treasuries could narrow or even turn positive as the economies’ outlooks diverge, potentially slowing outflows from Chinese bonds or even boosting inflows, said Li Liuyang.

The jump in Chinese stocks since May could also attract foreign investors. According to the Institute of International Finance, foreign investors added positions in Chinese equities in June with a net of USD9.1 billion capital inflow while Chinese debt showed an outflow of USD2.5 billion.

The narrowing spread between the offshore and onshore yuan rates may also indicate a reduction in bearish sentiment towards the yuan. According to Wind, the CNY closing price was 214 pips higher than that of CNH last Friday, compared with as much as -590 pips in early May when the yuan saw a sharp fall.

Analysts at China Construction Bank said their clients are selling foreign currency when USDCNY hits 6.70, which has supported the yuan, though they warned that listed companies will continue to pay dividends this month, possibly prompting demand for Fx and pressuring the yuan.

China’s trade surplus should remain wide as the deficit in services lags due to restrictions on outbound travel, and as imports are weaker than exports, analysts noted.

Last week, the CNY onshore yuan and the CNH offshore rate rallied by 0.1% and 0.17% respectively against the greenback even as the dollar index surged 1.8% to a decade-high 108, in the strongest performance by an Asian currency. So far in July, USDCNY rose by 0.2% compared to a 3.3% rally for the dollar index.