By Winni Zhou and Alun John
SHANGHAI/HONG KONG (Reuters) – Major investment firms are cutting their forecasts for the yuan for the second time in just three weeks as the Chinese currency’s recent sharp declines ripped through their previous revisions, catching many off guard.
A triple whammy of slowing growth, COVID-19-related economic disruption and aggressive US Fed tightening has put strong downward pressure on the yuan, while Chinese authorities appear to be on the sidelines to drop their tightly managed currency.
The yuan spot rate has fallen more than 6% against the dollar over the past four weeks and stood at 6.7992 to the dollar on Monday, beating the year-end median of 6.71 expected in a survey of nine banks at the end of April.
Several banks are now seeing the yuan weaken to 6.9 or even hit the 7 mark before the end of the year, levels not seen since the start of the pandemic in 2020.
HSBC said in a note that the currency stretched, “especially against the backdrop of the slowing Chinese economy and the Fed which remains firmly hawkish.
“There aren’t any new developments per se either, but things have gotten more intense, which we think is worth factoring into our forecast.”
HSBC, lowering its forecast for the yuan for the second time in three weeks, now expects the yuan to trade at 6.75 to the dollar at the end of the second quarter before rebounding to 6.70 at the end of the second quarter. end of the third quarter, down from 6.60 and 6.62, respectively, after its previous revision.
The late-April survey of nine banks had projected the yuan at 6.63 to the dollar at the end of June, according to the median forecast. A majority of respondents expected the yuan to weaken further to 6.71 towards the end of the year.
But the yuan’s latest tumble, to its lowest in nearly 20 months and a rare gyration for a currency that has typically been tightly range-bound, has led many analysts to forecast further weakness.
A slew of weaker-than-expected April economic data released on Monday and last week, including credit lending, retail sales and industrial production, reaffirmed market sentiment that the world’s second-largest economy is facing to growing headwinds as COVID-19 lockdowns take their toll.
“USD/CNY could rise rapidly to 7 if onshore COVID situations worsen with more lockdowns followed by severe supply chain disruptions,” Barclays said in a note.
The bank also noted the possibility, however, that the yuan could quickly come back if the authorities intervened to support the currency or to support the economy.
“Downside risk stems from the People’s Bank of China (PBOC) aggressively leaning against further CNY weakness and a stronger-than-expected dollar decline; risk sentiment could also boost the CNY in the event massive stimulus. In this case, USD/CNY could see a quick retracement to 6.70.”
Barclays lowered its yuan forecast to 6.9 to the dollar at the end of the second quarter, from 6.3 previously, to account for a stronger dollar and foreign portfolio outflows.
Others, including Mizuho Bank and UBS, also cut their yuan projections to reflect bearish sentiment.
Ken Cheung, chief Asian currency strategist at Mizuho Bank, cut his year-end forecast for the yuan for the second time on Monday to 6.7 from 6.6.
Wang Tao, chief China economist at UBS, revised his year-end forecast to 6.9 from 6.6 previously.
“USD/CNY could break 7 before the end of the year due to USD strength and a likely sharp weakening in China’s exports and general economy, but should stabilize below of 7 by the end of the year,” she said.
“That’s because we expect the COVID-related economic impact to diminish in the second half of the year, with growth rebounding and market confidence improving.”
(Reporting by Winni Zhou and Alun John; Editing by Edmund Klamann)
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