China: RMB depreciation trend still intact - Nomura

Research Team at Nomura suggests that the President-elect Trump’s policies could have a significant negative impact on Asia and believes Donald Trump raises the risk of increased US fiscal spending, higher inflation (also partly from protectionism and immigration), and a need for the market to reprice a risk of faster paced US Fed hikes.

Key Quotes

“Our conviction to be short RMB remains high because of the direct and indirect risks to China from Donald Trump. Aside from the risk of faster paced Fed hikes, as highlighted in the 13-14 December FOMC minutes, the direct risks include Donald Trump potentially naming China a currency manipulator, or worse, imposing tariffs on China’s imports. If China is only named a currency manipulator, there is unlikely to be a substantial shift in China’s trade and FX policy. However, if Donald Trump imposes tariffs on China’s products, there is a risk that China will take retaliatory action, such as subjecting US companies to tax or antitrust probes, anti-dumping investigations and scaling back purchases of US products. In addition, the risk from a trade war will that China becomes more focused on the needs of its own economy, and allows greater policy flexibility, which would include a weaker RMB.”

“Beyond external risks to RMB, local risks include consistent net capital outflows (most recently reflected in the adjusted December FX reserve fall of USD31.6bn m-o-m), RMB overvaluation and a push in the medium term for increased RMB flexibility. Indeed, we view CNH (versus USD) appreciation at the start of 2017 as temporary, driven by consistent FX intervention and tight CNH liquidity. This follows earlier attempts to stabilise RMB depreciation expectations through lowerthan-projected fixings (30 out of 40 sessions from 15 November to 10 January 2017) and actions and threats from the government to reduce foreign currency demand. As such, even with the recent sharp CNH appreciation, we expect USD/CNH to move back towards the 7-figure over the next month with a likely break through this level to around 7.15 by around end-Q1 2017 (2.3% total return).”