26 Jan 2016
CNY will fall much further in 2016 - Rabobank
FXStreet (Delhi) – Michael Every, Head of Financial Markets at Rabobank, suggests that their USD/CNY forecast is still 7.60 by end- 2016, around a 15% depreciation from the 6.60 level prevailing at the time of writing.
Key Quotes
“Despite vociferous PBoC rebuttals that such currency forecasts are “ridiculous” and “impossible” there are a wide variety of arguments to explain that view, including:
Slower growth, interest rate differentials with the US as monetary policy diverges, declining export competitiveness and net capital outflows and declining FX reserves.
However, perhaps the single strongest reason to be bearish on CNY is the debt build-up. When debt-to-GDP rises as rapidly as it has, and to as high (and rising!) a level as it has in China, a weaker currency invariably follows.
Simply put, the CNY decline of 6% to date is nowhere near an adequate response to the fundamental problems China has.
As such, 2016 is likely to see CNY remain under downward pressure. So will the economy, which is desperately in need of real reforms. Of course, China has shown that it can take radical action when needed. However, the most recent example was to drain the CNH market of liquidity rather than allowing it to continue to depreciate and so reflect the lack of radical action elsewhere. CNH is now compliant, but the internationalization of the currency has been significantly set back. Let’s hope that same energy can be channeled into a broader reform process ahead.”
Key Quotes
“Despite vociferous PBoC rebuttals that such currency forecasts are “ridiculous” and “impossible” there are a wide variety of arguments to explain that view, including:
Slower growth, interest rate differentials with the US as monetary policy diverges, declining export competitiveness and net capital outflows and declining FX reserves.
However, perhaps the single strongest reason to be bearish on CNY is the debt build-up. When debt-to-GDP rises as rapidly as it has, and to as high (and rising!) a level as it has in China, a weaker currency invariably follows.
Simply put, the CNY decline of 6% to date is nowhere near an adequate response to the fundamental problems China has.
As such, 2016 is likely to see CNY remain under downward pressure. So will the economy, which is desperately in need of real reforms. Of course, China has shown that it can take radical action when needed. However, the most recent example was to drain the CNH market of liquidity rather than allowing it to continue to depreciate and so reflect the lack of radical action elsewhere. CNH is now compliant, but the internationalization of the currency has been significantly set back. Let’s hope that same energy can be channeled into a broader reform process ahead.”