In 12 month's time the Chinese yuan will have erased most of its gains made this year, provided the U.S. Federal Reserve sticks to its tightening path, boosting the greenback, a Reuters poll showed.
Having strengthened more than 3 per cent since the start of 2017, the yuan is forecast to weaken to 6.90 per dollar in a year, according to the poll of over 60 foreign exchange analysts taken between July 27–Aug 2. It was trading around 6.72 on Wednesday.
While the dollar should benefit when the Fed starts shrinking its balance sheet—which is expected "relatively soon"—it could falter again if the central bank fails to follow through with a rate hike later this year.
At the start of the year, traders had expected faster rate hikes from the Fed and some form of stimulus from the new Trump administration would drive the dollar up strongly against emerging currencies. But, the greenback has instead taken a beating on fading hopes that President Trump will be able to push through deep tax cuts and massive infrastructure spending. That has brightened the outlook for Asian currencies.
Strong Chinese economic data over recent months has cooled worries over the yuan's weakening, leaving further scope for the People's Bank of China (PBOC) to tighten the country's domestic liquidity conditions.
Authorities also tightened their grip on the yuan recently by adjusting the daily midpoint guidance formula to deter speculators betting on further falls in the yuan. That move has been reinforced by frequent dollar selling by state banks. This is helping in the restoration of market confidence in the currency.
“China's currency had long been struggling with depreciation pressure, which is now history for the time being,” wrote Stefan Grosse, economist at NORD/LB. “The U.S. dollar's current phase of weakness is helping the renminbi (yuan),” he noted.
In its latest report, The International Monetary Fund (IMF) said the yuan's exchange rate is broadly consistent with underlying economic fundamentals and desirable policies. Fitch Ratings agency echoed the IMF's view, confirming a stable outlook on the Chinese economy and maintaining its A+ rating, citing improvement in the country's external finances as well as macroeconomic picture.
A separate Reuters poll showed speculators increased their positions in favour of most Asian currencies.
Bullish bets on the Chinese yuan were at their highest since December late last month. Investors also turned bullish on the Indian rupee after being sellers of the currency since April. The Indian rupee is now forecast to have weakened to 65.00 per dollar in a year, lower than the 63.70 it was trading around on Wednesday, having gained roughly 6 percent so far in 2017.
On Wednesday, the Reserve Bank of India (RBI) cut its policy rate by 25 basis points to 6.0 per cent as expected, the lowest since November 2010, on concerns over softening inflation. The poll was taken before the rate decision. The RBI also cut the reverse repo rate by 25 basis points to 5.75 per cent.
India is set to reclaim its position as the fastest growing major economy, with GDP expected to grow an annual 7.3 per cent in the current fiscal year, benefiting from a new goods and services tax policy.
But in the near-term the impact of the new tax is expected to be negative for the economy and a lack of clarity among producers hurt the country's factory activity in July, which shrank at its fastest rate in more than nine years. “Within the emerging market space, currencies with strong fundamentals could continue to gain despite stretched valuations. INR falls in this category,” said Tushar Arora, senior economist at HDFC Bank.