USDCNY: 2017 year end forecast lowered from 7.20 to 7.10 - HSBC

The analysis team at HSBC has lowered their 2017 year end forecast of USD-RMB from 7.20 to 7.10.

Key Quotes

“The broad dollar trend and the movements of other major reserve currencies (i.e. EUR, JPY, GBP) matter for the RMB. China’s Premier Li Keqiang adopted new language to discuss the RMB in his 2017 annual work report to the National People’s Congress: “the RMB exchange rate will be further liberalised, and the currency’s stable position in the global monetary system will be maintained.” In our view, he was emphasizing the importance of the RMB’s effective exchange rate.”  

“Our revised USD-RMB forecast takes into account the latest projections of the EUR-USD, USD-JPY and GBP-USD exchange rates, while maintaining our long-held view that the CFETS RMB index needs to fall 3-5% from its end-2016 level to further correct the CNY’s overvaluation.”

“In other words, we are still of the view that the RMB will depreciate against a broad range of currencies, including the USD, for the rest of 2017, albeit by a lesser degree than we had previously forecast. This is because there are important structural factors – residents’ asset diversification – driving capital outflows. While there have been enhanced regulatory oversight over capital outflows since December 2016, we believe outflows driven by rational and genuine needs, for example those related to the Belt and Road Initiative (BRI), are still encouraged.”

“There are two other reasons behind our more moderate USD-RMB forecasts, and these are China-specific factors. First, the Chinese economy has fared better than expected, and the authorities are taking the opportunity to encourage financial de-leveraging through a tighter monetary stance. This, along with moderating expectations about US reflation, has arrested the narrowing of the China–US interest rate differential, and helped stabilise the RMB.”

“Second, the USD-CNY fixings have been persistently showing a downward bias, as China is trying to send a strong message to the US that it will not weaken its currency to gain trade competitiveness. That being said, we do not believe there is a ceiling for USD-RMB at say 7.00. Instead, the first half of Premier Li’s comment on the RMB in the work report suggests that China is also committed to exchange rate reforms and a more flexible exchange rate.”