China: Yuan exchange rate likely to maintain a weak trend in the coming months – BBVA

According to the Research Department at BBVA, the central bank of China has already taken a series of measures to intervene the FX market to maintain the exchange rate of RMB. They expect the Yuan exchange rate to maintain a weak trend in the coming months.

Key Quotes:  

“After the August 11th 2015 RMB exchange rate reform, RMB exchange rate is experiencing the second round of depreciation since April this year amid the trade war risk. In addition, the discrepancy between offshore and onshore RMB exchange rate expanded significantly in the recent month, indicating global investors’ passive sentiments towards RMB depreciation.”

“The drivers to the recent RMB sharp depreciations after the appreciation trend from April 2017 to April 2018 including the following factors: (i) Escalation of the trade war with the US; (ii) Strong DXY performance; (iii) Domestic economic slowdown; (iv) Easing monetary measures to offset trade war risks, leading the interest rate difference with the US expanded.”

“In the future, the PBoC might use the measures that were implemented during 2015 market turmoil, if the RMB exchange rate approaching the psychological level at 7 in the future, including capital control, intervene HK offshore market, using foreign reserve to defend etc.”

“Continuing depreciation pressure will be last for the following months, due to the unsettled trade war and domestic growth slowdown. In addition, FED interest rate hike will also add pressure on RMB. However, we do not think RMB exchange rate will depreciate above the psychological level at 7, due to the PBoC has more experience to intervene the market and does not want domestic financial turmoil again as 2015. Under the current circumstance, the equilibrium exchange rate should be in a range of 6.7-7. In the future, RMB exchange rate flexibility will be further enhanced, as exchange rate reform deepened. All in all, economic fundamentals of RMB.”