Group Economics
EM FX Weekly
Macro & Financial Markets Research Roy Teo, Arjen van Dijkhuizen,
Delay in CNY liberalization?
+65-6597 8616
9 July 2015 • • • •
Downside risks to China economic outlook – more monetary easing in pipeline Markets pricing in larger depreciation in the yuan next year Delay in exchange rate liberalization and CNY inclusion in SDR basket? Asian currencies’ resilience – some bright spots
More China worries
market. Nevertheless, the recent sharp selloff in China equity
The sharp decline in China’s equity markets, following an
markets has sparked criticism that the regulations and
amazing rally, also poses downward risks for the economy.
mechanisms to promote stable financial markets are not robust
This could particularly work through confidence effects. Wealth
enough. Weakness in equity markets is likely to spark further
effects might still play a limited role, as overall equity holdings
capital outflows and pressure on the Chinese yuan. This may
are still relatively moderate in GDP terms (and Chinese equity
impede China’s intent and objective to speed up the capital
markets are still one of the best-performing year-to-date). The
account liberalization process. A wider trading band for the
sell-off might also lead to arise in non-performing loans and
yuan could be delayed and intervention by the central bank to
complicate the strategy to use equity issuance to reduce debt
defend weakness in the yuan will continue. As a result, the
levels. All in all, although hard to estimate at this stage, the
probability that the yuan will be included in the SDR basket
stock market crash has added further downside risks to the
later this year has fallen
economic outlook. Next week, China’s Q2 GDP print will be crucial for market sentiment. Economic growth is expected to
Asian currencies’ resilience – some bright spots
ease from 7% to 6.8% according to market consensus. We
Asian currencies have continued their recent resilience despite
expect the People’s Bank of China to cut the benchmark rates
continued worries surrounding Greece and China. We think
further by 25bp and lower the reserve requirement ratio by an
that the possible fall-out from China would have a larger
additional 50-100bp in the coming months to support the
impact on Asian currencies than Greece. China growth
economy.
concerns have pressured commodity prices. With the exception of Indonesia and Malaysia, Asian countries are net
Pressure on CNY muted; depreciation expectations
commodities importers. The decline in commodity prices
increasing
should benefit most Asian economies’ terms of trade. India and
Despite the 30% decline in equity markets since the middle of
Indonesia’s inflation outlook should also improve as a result of
June, the Chinese yuan (CNY) has remained relatively stable.
lower oil prices. Still, should the Chinese economy slow more
We suspect that the central bank has been in the market to
than expected, that might also have negative spill-over effects
ease volatility in the exchange rate. Furthermore, the central
to Asian economies and Asian currencies.
bank has kept the yuan daily fix stable as they lean against market forces that a weaker yuan is a one way bet. Nevertheless, the options market demand to hedge volatility and depreciation in the yuan has increased slightly. The offshore non-deliverable forward market is also implying that Chinese authorities will be more tolerant in a weaker exchange rate next year after the IMF review on the CNY inclusion in the SDR basket later this year. We maintain our view that the yuan will decline towards 6.30 and 6.40 by the end of 2015 and 2016, respectively. Delay in exchange rate liberalization and CNY inclusion in SDR basket? At the time of writing, measures deployed by the Chinese authorities in recent days seem to have stabilized the equity
ABN AMRO emerging market currency forecasts USD/CNH 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
09-Jul 6.21 63 1,134 1.35 33.93 31.07 13,333 57 2.68 12.50 4.23 27.50 317 3.24 15.83 652
Q3 2015 6.26 65 1,130 1.37 33.80 31.30 13,500 52 2.85 12.20 3.95 27.50 315 3.15 15.50 630
Q4 2015 6.30 65 1,130 1.40 34.00 31.50 13,700 50 2.85 12.20 3.90 27.50 320 3.20 15.50 630
Source: ABN AMRO Group Economics
Q1 2016 6.35 65 1,140 1.42 34.50 31.80 13,800 48 2.85 12.20 3.85 27.40 320 3.20 15.25 635
Q2 2016 6.37 66 1,150 1.43 34.80 32.00 13,900 47 2.85 12.20 3.85 27.25 325 3.25 15.25 640
Q3 2016 6.38 66 1,150 1.44 34.80 32.20 14,000 46 2.85 12.20 3.85 27.00 325 3.30 15.00 645
Q4 2016 6.40 66 1,150 1.45 34.80 32.50 14,100 45 2.85 12.20 3.85 26.75 330 3.40 15.00 650
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EM FX Weekly - Delay in CNY liberalization?
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