2015-08-25

Chinese Govt Agencies Expect USDCNY to Fall to 7 in 2015; 8 in 2015

Bloomberg: Chinese Agencies Have Begun to Assume Yuan at 7 to Dollar in Research
Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter.

The research further factors in the yuan falling to 8 to the dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven’t been made public. Those projections -- which suggest a depreciation of more than 8 percent by Dec. 31 and about 20 percent by the end of 2016 -- were adopted after the currency was devalued this month and compare with analysts’ forecasts for the yuan to reach 6.5 to the dollar by the end of this year.
A week ago I posted Putting A Price on Yuan Depreciation; Analyst Reserve Forecasts Imply Depreciation of 2% to 10%
If this pace were to keep up and the relationship between the drop in reserves and the drop in the yuan to remain roughly proportional, a year end target for the yuan would be 6.8 per dollar, but financial markets aren't linear. A further drop in reserves will eventually trigger a bigger drop in the yuan. I'd expect markets to push it much closer to, or beyond, 7 yuan per dollar if reserves end the year closer to $3 trillion.
The government targets are reasonable, but you have to wonder where the financial markets might take the yuan given their predilection for overshooting the target.

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