China's yuan is forecast to move only a little in the coming months as authorities keep a tight leash on the currency until it becomes clear whether the trade spat with the United States will worsen, a Reuters poll showed. Despite the severity of the dispute and the potential to disrupt trade flows elsewhere, the range of yuan forecasts is even tighter than it was in polls taken in April and at the start of the year, reflecting that caution.
The move in the extremes of the range also suggests a gradual appreciation in the yuan. In the meantime, the resurgent US dollar is at its strongest in over three months, but is still down more than 2 percent so far in 2018 against the yuan.
The yuan is forecast to trade steady at 6.37 per dollar in three months, according to a Reuters survey of over 60 foreign exchange analysts taken May 3-9. The currency is predicted to trade at 6.36 in a year. "As the US dollar heads higher, it is unlikely that the Chinese yuan will be immune to this move. But, we expect USD/CNY to continue to range trade in the near term amid US-China trade tensions," said Irene Cheung, senior strategist for Asia at ANZ.
Chinese officials are expected to meet their US counterparts in Washington for a second round of negotiations next week, after talks last week in Beijing highlighted by a list of aggressive US demands.
"A slight but persistent upward bias in the USD/CNY fixing and a cut in the Reserve Requirement Ratio (RRR) suggest that China is being cautious until the trade tensions are resolved," Cheung added. The People's Bank of China (PBoC) lowered its daily currency reference rate to its weakest since January on Wednesday. That move suggests policymakers might be working to limit gains in the yuan.
"It is unlikely that China and the US will reach a grand deal very soon, given the large gap between the list of demands and offers," said Haibin Zhu, chief China economist at JPMorgan in a note to clients. "The biggest risk at this stage is that both sides have the wrong perception of the counterpart's bottom line, and both sides seem to have under-estimated the losses if a trade war eventually occurs."
The risk of a trade war between the United States and China threatens to curb the economic momentum created by years of policy stimulus, a Reuters polls of over 500 economists worldwide found. According to a separate Reuters poll on currency positioning taken last week, bullish bets on the Chinese yuan fell to the lowest since October in the previous two weeks. But the survey did not point to any sharp depreciation in the yuan.
A majority of strategists forecast the yuan to rise. That includes two respondents predicting it to strengthen sharply to 6.0 per dollar or lower, a rate not seen since China unified its dual exchange rates, officially devaluing the yuan overnight by 33 percent in January 1994.
"Recent trade-related anxieties could support the greenback and restrain the yuan for now," said Erik Nelson, currency strategist at Wells Fargo. "But confidence surveys point to steady and orderly growth, inflation has ticked higher, and China is gradually nudging interest rates up - factors that should eventually see a stronger Chinese yuan versus a soft US dollar."
To counter capital outflows following an interest rate hike from the US Federal Reserve on March 21 the Chinese central bank raised its seven-day rate the day after and its 14-day rate in April.
That is a clear signal Beijing is watching policy moves across the globe and is ready to contain capital outflow risks. The Indian rupee, which has lost nearly 6 percent this year, hit its lowest level since February 2017 on Wednesday. But the currency is predicted to recoup some of those losses against the dollar over the coming year, largely supported by expectations for strong economic growth.
The latest consensus is for the rupee to trade at 66.29 per dollar by end-July and at 65.83 in a year. It was trading around 67.42 on Wednesday.
"We see a firmer rupee over time. Overall economic growth continues to recover, while inflation softened. India's central bank remains neutral for now, while the committee's composition of votes remains slightly hawkish," added Wells Fargo's Nelson. "India's relatively high interest rates and the recent announcement to increase debt quotas for foreign investors should support the rupee via capital inflows."