Em fx weekly 1 october 2015

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

2

EM FX Weekly - Recent yuan gains are not sustainable

Find out more about Group Economics at:https://insights.abnamro.nl/en/ This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics.The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer.

No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document afterthe date thereof.

Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks andany possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product 窶田onsidering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee forfuture returns. ABN AMRO reserves the right to make amendments to this material. ﾂｩ Copyright 2015 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").