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Curve Twist Steepens, Futures Narrow

MNI: Yuan Seen Trading Near 6.40 Before Q1 Weakness-Advisors

SINGAPORE (MNI)

The yuan faces a slowing economy and lower exports headed into next year.

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The Chinese yuan should trade close to current levels against the dollar for the rest of the year after approaching a three-year high set in May, but the currency may come under pressure in early 2022 if exports lose steam and the economy fails to pick up, prompting central bank easing, policy advisors and trader told MNI.

USDCNY is unlikely to strengthen beyond 6.30 to the dollar this year, and could soften above 6.40, said Zhang Ming, deputy head of the Institute of Finance and Banking at the Chinese Academy of Social Sciences. The yuan has traded in a range between 6.58 and 6.36 in 2021, after appreciating steadily for more than six months from the levels around 7.15 it reached in May 2020.

Zhang said China's expanding trade surplus, produced by surprisingly strong exports, had driven the recent yuan rally, which saw the currency break support at 6.40 which had held since June. The dollar has weakened 1.2% against the yuan this month, outpacing the 0.37% fall in the dollar index.

MONETARY POLICY

This trend may soon turn, Zhang said, as the Federal Reserve shifts into tightening mode just as expectations build for the People's Bank of China to ease monetary policy.

In the meantime, the PBOC will be little concerned by the current yuan strength, the economist said, as while currency appreciation may squeeze exporters' margins, it will partially offset surging prices for imported energy and raw materials which have pushed factory-gate inflation to a more-than-two-decade high, see: MNI: Surge In China Factory Prices Needs PBOC Credit Expansion.

As of the end of September, foreign exchange deposits at non-financial companies rose by USD62.5 billion, or 34.4% year-on-year, according to State Administration of Foreign Exchange data.

TRADE AND MARKETS

Tu Yonghong, deputy director of the International Monetary Institute, a prominent think tank at China Renmin University, agreed that 6.40 should be the mid-point for the yuan in Q4, with the currency supported by the trade surplus and capital inflows.

Another factor boosting the yuan in Q4 is reduced demand for foreign currency from outbound Chinese tourism, one of the main domestic resident channels for dollar usage, due to pandemic restrictions, Tu said.

The yuan's appreciation in recent days was also driven by foreign financial institutions selling out of short positions as speculation faded of another reserve requirement cut by the PBOC, a trader for a big Chinese bank told MNI. Signs of improvement in relations with the U.S. also boosted the currency, the trader said.

But soft industrial output data may be a leading indicator of export growth weakening in Q1 2022 from today's levels around 20%, the trader said, noting that this combined with PBOC easing could put pressure on the yuan.