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USD seen dropping to 6.30 yuan in Q3 before rising in mid-2022
Analysts at UBS Chief Investment Office have forecast the USD to dip in the third quarter before rebounding next year. Photo: Reuters.

Financial chiefs in China say they won’t change their policy in regard to the currency, despite calls for the yuan to appreciate to counter rises in commodity prices. Meanwhile, some foreign analysts say they expect the US dollar to weaken against the  yuan in the third quarter, before strengthening in mid-2022.

(AF) A debate has been going on in China recently on whether the country’s financial chiefs should allow the RMB/yuan to strengthen in a bid to offset rising commodity prices.

The central bank said over the weekend it had no plan to change its currency policy after remarks by researchers unnerved the market. And on Wednesday May 26 a state-owned paper ran a front-page commentary that said an appreciation in the yuan might not be a good way to deal with rises in commodity prices.

Market participants told Reuters they believed the commentary by Professor Wang Jinbin at Renmin University reflected China’s official stance in regard to recent debate about the yuan and the surge in factory-gate prices.

Wang said it was not appropriate to use monetary policy tools to cope with structural increases in import prices. “From a policy perspective, yuan exchange rate policy is acting as an important monetary policy tool. Structural increases in commodity prices in global financial markets do not mean significant inflationary pressures will occur globally.”

The Chinese yuan has strengthened to three-year highs against the US dollar. On Wednesday, the onshore yuan broke through 6.40 – a key psychological level – to trade at 6.3913.

This occurred after China’s major state-owned banks bought dollars on Tuesday at that level in a move viewed as an attempt to cool the rally, sources told Reuters.

The dollar was steady at around 5-month lows in early London trading on Wednesday.

Dollar tipped to drop, then rebound

Meanwhile, some analysts see the dollar dropping against the yuan in the third quarter before it begins to gain strength toward the end of the year and into 2022.

In a report on Monday, strategists Dominic Schnider and Teck Leng Tan, from UBS’ Chief Investment Office,  said they “see more downside” for USD/CNY in third quarter – and more upside in 2022 “as USD weakness comes to an end”.

Their new forecasts were for 6.30 at end-September, 6.35 at end-December, 6.40 at end-March and 6.45 at end-June in 2022.

They advised investors to closely watch communication by the US Federal Reserve in the last quarter.

“Our forecast shift is based on three factors. First, we expect the Federal Reserve to prepare the market sometime in 2H21 for a tapering of its asset purchases in 2022. This should push up longer-dated US interest rates, both in nominal and real terms, and reduce the CNY yield carry, which is currently attractive,” the UBS duo wrote.

“Second, we think that global GDP growth will ease next year, which could broadly dent investors’ risk appetite. Third, we expect China’s current account surpluses to moderate again next year. We expect these factors together to prevent further CNY gains versus the greenback, causing the exchange rate to trade sideways in 4Q21 and rise in 2022. Given the uncertainty about the timing of this turning point, our forecast changes are modest.”

They do not expect USD/CNY moves below 6.30 to last. “Investors are advised to keep their long CNY exposure unhedged versus the USD, and to target a USD/CNY move to 6.30 in the coming months with potential dips to 6.30.

“We expect USD/CNY to trade in a 6.30–6.50 band over the next three months, with the spot gravitating toward the lower boundary.”

They said the main risks to their forecasts were a sharp risk-off move in financial markets, or a renewed step-up in the 10-year US Treasury yield, which would provide renewed USD support.

“A sharp deterioration in US-China relations could prevent USD/CNY from moving lower in the short run,” they warned.

With reporting by Reuters.

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