© Hans Gustafson
|
Since November last year, The People's Bank of China has been targeting both the USD/CNH currency pair and currency basket, as they have their own CFETS RMB Index's currency basket, which means that the PBOC is no longer forced to follow the USD. Now, as the Yuan's performance is compared against a wider selection of peers, the PBOC has more freedom, as they can choose between the two targets: the currency basket or the US Dollar. At the moment, I expect the USD/CNH, which is currently around 6.65, to move to 6.80 in one year's time, hopefully in an orderly fashion. Moreover, I anticipate the Chinese currency to weaken 4% to 5% against the currency basket during the same period.
Over the recent time, the CNH has weakened a little bit too fast; therefore, the PBOC had to intervene in the market to prevent further weakening. The reason for the weak trend is that the Chinese still have deflation in the producer prices; thus the weaker currency will help the industry move out of the overcapacity problem that they are facing. Otherwise, they do not have any obvious need for a weaker currency, as China runs a very high trade surplus.
What will be the major drivers for CNH throughout the same period?
The major driver for the moves in the Yuan will definitely be the Greenback. If the US Dollar remains where it is right now or continues to weaken, the Chinese Central bank could continue to gradually weaken the Yuan. However, in case the Dollar grows much stronger, things would complicate, as that may create a similar situation to what we have had in January, when there was a massive speculation against the Chinese Yuan. In such case, the CNH might actually fall much lower, but that is not what I expect; nevertheless, that is still the risk. However, the main risk is certainly the Greenback, which could be triggered by more uncertainty and chaos in the EU after the ‘Brexit'. The other drivers would be deflation in producer prices and also weak growth in the industrial production.