Yuan to fall as outflows overshadow Trump FX rhetoric: Reuters poll

BENGALURU China’s currency is expected to fall to a near decade-low in the year ahead, according to a Reuters poll of FX strategists, as authorities struggle to stem capital outflows and despite the central bank’s surprise short-term interest rate hikes.

The bearish views on the yuan come against U.S. President Donald Trump’s accusations that Beijing has devalued its currency to gain a trade advantage and his open displeasure at the United States’ historic strong dollar policies.

The poll of over 50 foreign exchange analysts this week showed further losses for the yuan, also known as the renminbi, were possible over the next 12 months.

Jason Daw, head of emerging market FX strategy at Societe Generale, said that emerging market currencies, like the yuan, “require a positive narrative” to sustain a recovery.

“Risk premia should remain elevated as the market grapples with U.S. policies, with Asia in particular risk from protectionism,” he noted.

“Beijing’s ultimate goal is to let the (yuan) reach a market clearing price sooner rather than later, albeit without a major one-off devaluation during the process. This is already challenging enough and now the potential policy mix from the Trump administration has further complicated the task.”

China’s central bank has spent hundreds of billions of dollars in reserves to keep the yuan from falling further and has taken several measures in recent months aimed at making it more difficult for Chinese individuals and companies to send money abroad.

Despite this, the closely-managed yuan CNY=CFXS fell almost 7 percent last year, marking its biggest loss against the dollar since 1994, in part due to an uncertain outlook on China’s economy.

The currency has found some support in recent developments, such as a revival in government borrowing and spending.

The central bank also raised short-term interest rates last week in a surprise move and set a firmer official midpoint than markets had expected on Monday, which pushed the yuan higher to 6.86 against a subdued dollar.

But while the currency is forecast to trade around that level to the dollar by the end of the month, it is then expected to fall to 7.18 in a year, which would mark its lowest level in nearly a decade if reached.

“A rising dollar and an unrelenting desire for FX diversification by local residents means more (yuan) depreciation pressure,” added Societe Generale’s Daw.

(Additional reporting and polling by Shaloo Shrivastava- Editing by Ross Finley and Sam Holmes)