SocGen New Yuan Targets

ZH: Kyle Bass Was Right: Here Is SocGen's Primer How To Trade The Biggest Yuan "Depreciation Wave" Yet

7.10 peak – our base case, 80% probability

The next wave of RMB depreciation will see USD-CNY trade up to 7.10 by mid-2017. Since USD-CNY bottomed in early 2014, there have been five waves of depreciation and each has followed a predictable pattern: three to five months of USD-CNY increasing (+3.5% on average), followed by modest gains (+1%) spanning an equivalent time span, before another round of depreciation ensues. The predictability is suboptimal from a policy perspective, but it appears to be the PBoC’s standard playbook. While there could be some consolidation or modest strength after the current depreciation phase ends (3.6% since April), the ensuing wave and medium-term path should see USD-CNY reach 7.10 over the next year.

Cumulative depreciation of 6% over the next year would be similar to what has been experienced since October. This would not be an atypical base case for a country in a structural slowdown, with perceptible credit and banking sector risks, an imbalance in the supply-demand of capital, a tenuous reserve adequacy position, and local residents harbouring a strong desire for FX diversification.
We continue to believe that consensus is underestimating the chances of CNY depreciation, both from the ability and willingness of policymakers to prevent further depreciation. Consensus is at 6.80 in one year, which was our prior out-of-consensus call immediately following the August devaluation (back in late August consensus was at 6.50).

...The new risk scenario for CNY is 8.0 (20% increase in USD-CNY). We assign 20% probability to this scenario. The caveat is that the pain threshold for the market appears to be much higher than before and the implications for the global financial markets will primarily depend on the speed of depreciation. We believe that it would take significantly more pressure on capital flows than what we have seen over the past few years, or an economic hard landing, for our risk scenario to unfold. Note that we have a 30% probability of a hard landing of the Chinese economy. We think that an economic hard landing might not necessarily trigger a sharp devaluation, as the authorities would most likely respond with strict capital controls amid concerns over capital flight.

Looking only at China this is a good forecast, but putting together a global picture, I put higher odds on the lower yuan. A 20 percent devaluation from current levels take the yuan to 8.3 and equals a 35 percent devaluation from the peak. A 20 percent rally in DXY would take the index to about 115. The euro would be below parity, the pound could be at parity, and the USDJPY could be above 150. Gold would be at new all-time highs in most major currencies. USDCNY Target