SINGAPORE (Reuters) – Major investment firms have cut their forecasts for the yuan as its slide against the dollar accelerates, with some expecting a breakout of the 7-to-$1 mark ahead of congress. politically sensitive party next month, despite authorities’ efforts to slow the slide.

The yuan has weakened 2.7% against the dollar over the past three weeks, hitting a two-year low of 6.9350 on Monday, and is down more than 8% year-to-date , under pressure from both the strong global dollar and China’s deepening economic slowdown.

A rapid breakout of 7 to the dollar – breached only twice since the 2008 global financial crisis – could stoke fears of capital outflows just as authorities seek to mobilize resources to revive the battered economy outbreaks of COVID-19 and a weak property market.

It could also be an unwelcome distraction for leaders gathering from October 16 for the Party Congress, which is held once every five years, although some analysts expect authorities to eventually accept more weakening of the yuan.

“Over the three-month horizon, we expect policymakers to have a higher tolerance for CNY depreciation, because by then the 20th Party Congress will have ended and a weaker currency could help reduce headwinds to export growth,” Goldman Sachs said in a note.

Goldman Sachs and ANZ believe that the 7 per dollar mark will not be crossed until after the Party Congress.

But others, including Nomura, MUFG and SEB, also see a chance for the yuan to hit the key threshold this month.

Market analysts widely believe that the People’s Bank of China’s (PBOC) unexpected key interest rate cuts in August accelerated the yuan’s slide, reaffirming that Beijing is an outlier in global monetary policy, while most other major economies are tightening policy to control inflation.

“(China’s policy) only underscores the weakness in the economy,” Maybank analysts said.

“As long as the zero-COVID policy (continues) and there is no significant recovery in the real estate sector, the PBOC must remain in easing mode,” they added. “Such an environment would be negative for the yuan.”

Maybank revised down its forecast for the yuan to 7 to the dollar at the end of the third quarter and 6.95 at the end of December, from 6.75 and 6.70 respectively in their previous forecasts.

Ken Cheung, Chief Asian Currency Strategist at Mizuho Bank, explicitly linked the yuan’s outlook to China’s economic growth outlook: “Market participants tend to buy USD/CNY to hedge macro risk for China”.

Authorities, however, expressed concern over the latest rapid decline. Reuters reported that China’s foreign exchange regulator phoned several banks in late August to warn them against aggressive selling of the Chinese currency.

Ever-firmer-than-expected median yuan fixations over the past two weeks are another clear sign that authorities don’t want to see a sharp decline right now, said Irene Cheung, senior Asia strategist at ANZ.

“This will help cap USD/CNY at the 6.9 handle in the near term. However, a breach of the 7 mark after the conclusion of the National Congress is possible,” she said.

(Reporting by Tom Westbrook in Singapore, Shanghai Newsroom; Editing by Edmund Klamann)

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