Putting A Price on Yuan Depreciation; Analyst Reserve Forecasts Imply Depreciation of 2% to 10%

Analysts are almost always wrong and never more so than at turning points. Bet on the analysts getting the direction right, but being way too conservative on the numbers.
Bloomberg: China Reserves Take a $40 Billion Hit on Yuan Intervention
China’s foreign-exchange reserves are expected to drop by some $40 billion a month as the central bank intervenes to support the yuan, a Bloomberg survey showed.

The holdings, the world’s largest, will decline to $3.45 trillion by year-end from $3.65 trillion at the end of July, based on the median estimate of 28 strategists and traders surveyed following last week’s surprise devaluation of the currency. The forecasts ranged from $3 trillion to $3.71 trillion. The currency is seen weakening 1.6 percent to 6.50 a dollar in the remainder of 2015, the survey showed.
I'm betting the analyst predicting $3 trillion is going to be closer to the mark.

To highlight my point about the analysts, Chinese reserves have been falling at an average rate of $26 billion a month since reserves peaked in June 2014. Will yuan depreciation cause no change in expectations or individual behavior, and also will the yuan defense cost only $14 billion a month on top of existing reserve outflows? I'm skeptical, but if this scenario plays out, the yuan may not depreciate much more this year and 6.50 yuan per dollar is a solid target.

Here is what the above chart looks like with the current CNYUSD price, as well as a possible path to $3 trillion in reserves by the end of the year:
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.

Update: BARCLAYS: The yuan could fall by another 7% this year
So far USD/CNY has risen by 3%, hence, a further 7% move would put USD/CNY spot at around 6.80. Given this, we have revised our year-end 2015 forecast for USD/CNY to 6.80 from 6.35, and expect relative stability thereafter, albeit still with upside risks. This view assumes that the Fed ignores the global turmoil and raises rates in September, in line with the expectation of our US economists.

No comments:

Post a Comment