China’s yuan could weaken if the Feds stick to 3 interest rate hikes in 2018

The following is a brief outlook on the future of the Chinese yuan against the greenback in 2018.

The results of a Reuters poll indicate that the bulk of the gains, the Chinese yuan has so far registered is likely to reverse if the U.S. Federal Reserve delivers three hikes in U.S. interest rates, as expected by the majority of economists, this year.

Last week, the Chinese yuan hit its 2 and 1/2 high and is up by nearly 3% so far this year. This appreciation in the value of the yuan can be mainly attributed to rising sell-off in the dollar as well as higher fixings of the official guidance rate by the People’s Bank of China (PBOC).

As per the results of the poll in which more than 60 foreign exchange strategists participated, the yuan is expected to weaken to 6.41 per dollar within 6 months and then rise to 6.44 within a year. It is currently trading around 6.33.

There is however a consensus among analysts that the USD will not rebound in the short term.

The dollar index, which measures the USD against a basket of 6 major currencies, fell by nearly 10% in 2017, and hit its lowest since December 2014 of 88.671 on February 1, 2018. It has however recovered lost grounds in the wake of the recent rise in U.S. Treasury yields.

“The recent strong rise in U.S. wages has triggered fears of higher inflation on the markets, to the benefit of the dollar. We see a good chance of it gaining further ground, which would tend to push up USD/CNY further as well,” said Thu Lan Nguyen, FX analyst at Commerzbank, in a note to clients.

He went on to add, “We expect CNY to slightly depreciate again over the coming quarters against USD, due to weaker growth prospects for the Chinese economy.”

Significantly, more than one-quarter of the poll participants see the Chinese yuan strengthening over the coming year to above its 2-1/2 year high, which it hit last week.

“We are constructive on the CNY due to positive fundamentals and downtrend in the USD. However, in the short term, USD may rebound further as risk aversion dominates,” said Irene Cheung, senior strategist for Asia at ANZ. “We forecast further CNY appreciation as capital flows have become more balanced and could shift towards a resumption of inflows as foreign demand for onshore China assets increase.”

Last week, the PBOC pledged that in 2018 it will maintain a neutral monetary policy while deepening market-based interest rate reforms and fend off systemic financial risks; these steps are likely to keep the yuan steady this year.

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