Group Economics
EM FX Weekly
Macro & Financial Markets Research Roy Teo ,+65 6597 8616
Recent yuan gains are not sustainable 1 October 2015 • • •
PBoC intervention supports Chinese yuan Recent gains in the yuan not sustainable EM FX recovered but uncertainties remain
PBoC intervention supports Chinese yuan
companies’ profits and inflation. In addition, we have
Despite weak economic data releases (sharp contraction in
previously stated that central banks’ increased demand for the
industrial profits in August), the Chinese yuan gained in the
yuan as a reserve currency will be small (the SDR quota
past week. This is due to two main factors: market
represents less than 3% of total global FX reserves) and
expectations that the yuan will be included in the IMF SDR
gradual.
basket have increased after leaders from China and the US met over the last weekend. The yuan inclusion in the SDR
In our view, a moderate further weakening of the yuan is
basket is expected to result in more central banks’ demand for
welcome to reduce headwinds to the Chinese economy. Last
the yuan as a reserve currency. More importantly, the yuan
but not least, the PBoC aggressive intervention to support the
strengthened after the People’s Bank of China (PBoC)
yuan in recent days could be to anchor market expectations
intervened in both the onshore and offshore market to support
that the depreciation in the yuan is not a one way bet ahead of
the currency. This has resulted in both onshore and offshore
National Day break from 1-7 October. Continued intervention
short term rates rising as yuan liquidity declined.
by the central bank is not consistent with the IMF SDR principles that the yuan should be more market determined.
Chinese yuan nominal effective exchange rate
We maintain our view that the yuan is expected to decline
Index level
towards 6.55 against the US dollar by the end of this year.
136 135
EM FX recovered
134
Last week, emerging market currencies recovered as investor
133 132 131 130
sentiment improved and commodity prices in general recovered. However, concerns about global growth and uncertainty about the start of the Fed hike cycle remain. The Indian rupee (INR) strengthened after the Reserve Bank of India (RBI) lowered the repo rate by 50bp to 6.75%, more than
129
market expectations of 25bp easing to support the economy.
128 Jan-15 Feb-15 Mar-15 May-15 Jun-15 Jul-15 Aug-15 Oct-15
Sentiment in the INR was also supportive as the RBI increased foreign investors limit on government bonds.
Source: BIS, ABN AMRO
ABN AMRO emerging market currency forecasts Recent gains in the yuan are not sustainable
01-Oct Q4 2015 6.36 6.55 6.36 6.55 65.6 66 1,176 1,240 1.40 1.46 36.43 36.40 32.76 33.40 14,676 15,000 65 60 3.01 3.10 13.73 14.00 4.24 4.15 27.50 27.50 313 315 3.95 4.00 16.82 17.00 696 700
Q1 2016 6.60 6.60 67 1,250 1.47 36.60 33.50 15,200 60 3.05 13.80 4.10 27.40 315 3.90 16.75 690
economic arguments why a weaker yuan is necessary. To
USD/CNY (onshore) USD/CNH (offshore) USD/INR USD/KRW USD/SGD USD/THB USD/TWD USD/IDR USD/RUB USD/TRY USD/ZAR EUR/PLN EUR/CZK EUR/HUF USD/BRL USD/MXN USD/CLP
summarise: the strong yuan has weighed on exports,
Source: ABN AMRO Group Economics
The recent gains in the yuan have resulted in the yuan strengthening by about 2% against its trade weighted basket of currencies 24 August At the time of writing, current levels in the yuan nominal effective exchange rate is less than 2% weaker compared to the level just before the PBoC implemented the new yuan reference mechanism on 11 August. In our previous publications, we have presented many
Q2 2016 6.65 6.65 67 1,270 1.49 36.80 33.70 15,400 55 3.00 13.60 4.05 27.25 310 3.85 16.50 680
Q3 2016 6.70 6.70 68 1,290 1.50 37.00 33.80 15,500 55 2.95 13.40 4.00 27.00 310 3.80 16.25 670
Q4 2016 6.75 6.75 68 1,300 1.52 37.30 34.00 15,600 55 2.90 13.20 4.00 26.75 310 3.75 16.00 660
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EM FX Weekly - Recent yuan gains are not sustainable
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