Yuan seen gaining 3% against greenback next year

Source: Xinhua | 2018-12-26

CHINA’S currency is expected to gain about 3 percent against the dollar in 2019 as Chinese authorities continue to support the yuan, especially in the first quarter, Standard Chartered Bank says in a new report.

The People’s Bank of China, the nation’s central bank, has successfully intervened in the market to keep the yuan stronger than seven to the US dollar and is expected to continue to do so.

This is part of moves toward a trade deal with the United States before a March 1 deadline, in which China has pledged to keep its currency at a “fair” rate, and to encourage more capital inflow as the inclusion of the yuan in various financial indexes encourages foreign investment.

The StanChart report sees the yuan hitting 6.65 to the dollar by the end of next year, from about 6.90 now but remaining below 7.0.

The foreign exchange market is likely to see the greatest pressure in the first quarter of next year, as China-US growth and interest rates are poised to diverge further and the current account deficit swings against China, the UK lender said in its report.

China reported a current account deficit with the US of  US$28.3 billion for the first half — the first deficit in two decades.

The global research team at Standard Chartered believes that the Chinese authorities will continue to support the currency via direct intervention or liquidity management in the first three months of 2019.

But things are likely to improve from the second quarter, as the Chinese government is expected to announce more pro-growth policies, which will lead to a stabilization and a rebound of China’s economy.

The economy is expected to slow to 6.5 percent or below in 2019 from about 6.7 percent in 2018.

But Standard Chartered estimates that the interest rate differential between the US and China will stabilize from April to the end of 2019 as the US Fed pauses its rate hikes.

The market has been scaling back expectations for Fed rate hikes for 2019 and the dollar is likely peaking, as the sugar rush impact from its fiscal stimulus will start to gradually wear off during the next 12 months, Standard Chartered noted.

The report said that incentives to support the yuan are rising, as capital outflows are contained and portfolio inflows will likely pick up on the inclusion of the Chinese currency in key indexes, which encourages investors.

StanChart estimates index inclusion will invite inflows of US$50 billion for equities in 2019 and US$286 billion for bonds by 2021.

Standard Chartered said that China’s ability to defend its currency remains strong but the cost will be “non-trivial.”

It expects direct foreign exchange intervention and tightening offshore yuan liquidity to remain the two main options for curbing the currency’s weakness in the near term, but they are likely to be used with more caution given increasing costs.