China to Defend Seven Yuan Per Dollar Rate, But May Find it Tough

November 1, 2018 Updated: November 1, 2018

BENGALURU—Chinese authorities will defend the yuan from weakening past the psychological 7 per dollar rate, very close to where it is trading now, according to a Reuters poll of foreign exchange strategists who said the currency will cut its losses in the coming year.

Interactive Reuters poll graphic

Still, 28 of 60 strategists polled from Oct 26 to 31 forecast the partially-managed yuan to weaken to 7 to the dollar or further at some point within a year, the highest count in Reuters polls since July last year and seven more than in the October poll.

Having weakened more than 7 percent so far this year, the yuan hit its weakest since the global financial crisis on Oct. 31, at 6.9748 per dollar. It’s been hammered by the trade war with the United States and bets for further monetary easing by the People’s Bank of China to bolster the stumbling economy.

But 20 of 37 currency strategists who answered an additional question in the latest Reuters poll said the Chinese authorities would stop the yuan from weakening to 7 per dollar or beyond.

The remaining 17 respondents said authorities would not intervene to defend that exchange rate.

“Even if we see clear signals that the Chinese central bank is against a depreciation of the renminbi, the depreciation pressure is not easing,” wrote Zhou Hao, senior emerging market economist at Commerzbank in Singapore, in a client note.

“Nevertheless, we continue to believe that the PBoC will not abandon the psychologically significant 7 mark easily. This could trigger a capital flight that would make it all the more difficult for Chinese leaders to maintain financial stability,” he added.

Capital outflows have increased as the yuan has approached 7 per dollar. Sales of net foreign exchanges by Chinese commercial banks rose to $17.6 billion in September, the highest since June 2017.

The onshore yuan was expected to gain around 1.8 percent to 6.85 per dollar in a year, according to the Oct. 26-31 poll of 60 foreign exchange strategists. It was last trading at 6.97 per dollar on Wednesday, just about 0.4 percent away from 7 per dollar.

Those expectations are largely dependent on a weakening of the dollar’s safe-haven appeal and a breakthrough in Sino-U.S. trade talks later this month.

Gao Qi, foreign exchange strategist with Scotiabank, says the yuan is not likely to cross through 7 per dollar in the run-up to the G20 summit scheduled at the end of November.

But if U.S. President Donald Trump and Chinese leader Xi Jinping fail to make a deal, he says it will.

“We expect the two presidents’ meeting to be able to de-escalate the tensions to some extent, which would then boost risk appetite at that time and prop up (emerging market) Asian currencies,” he added.

Trump said he thinks a deal with China will be secured, but threatened tariffs on another $267 billion worth of imports if it does not go through.

Breaking 7?

The Chinese central bank, which has cut reserve requirements for banks four times this year, is expected to ease monetary policy further while the government has pledged more tax cuts next year to support growth.

That could exert pressure on the yuan, pushing it to 7 per dollar or beyond.

In the latest poll, the 12-month yuan forecast was the most pessimistic median in Reuters polls since August last year.

Comparing the November and October polls, six of 35 common contributors revised their yuan forecast to reflect a stronger currency and thirteen kept projections unchanged. Sixteen revised forecasts to a weaker yuan.

That includes the weakest forecast of 7.30 per dollar, held by four banks at some point on the 12-month forecast horizon.

By Vivek Mishra