HALISTER1: BMI Revises USD/CNY Year-End Target to 6.85; End-2017 at 7.10

BMI Revises USD/CNY Year-End Target to 6.85; End-2017 at 7.10

(Bloomberg) -- USD/CNY end-2016 forecast is revised to 6.85 from 6.80 as yuan is still vulnerable to capital outflows, BMI Research, writes in note today.
  • Yuan sell-off since October largely consistent with PBOC’s policy goal;
    • PBOC will use foreign exchange reserves to limit volatility and steer CNY weaker gradually, rather than stepping in to strengthen yuan
  • Yuan still strong in real effective exchange rate terms;
    • Real interest rate differentials to move against the currency amid China’s economic downturn and rising US bond yields in three to six months
  • Sees USD/CNY 7.10 by end-2017; USD/CNY 7.40 by end-2018 as China remains mired in mid-term slowdown as structural weakness aren’t fully addressed
  • PBOC to cut 1-year benchmark interest rate by 25bps to 4.10% in 2017, then stay on hold through 2018
    • To keep liquidity ample via open market operation and medium-term lending facility
  • Expects continued portfolio outflows driven by downside pressure of real interest rate differential between China and major trade partners under easy monetary condition, yuan depreciation expectation and economic slowdown
  • USD/CNY rising for fourth day, up 0.12% to 6.8532
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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