December 16, 2008
Posted by: Dave Bhagat
The CNY has been noticeably weaker in December. After spending
several weeks around 6.82-6.83, it weakened towards 6.90, before
strengthening slightly at the end of last week when the dollar lost
ground to most currencies. In percentage terms, the move is
insignificant, but it has sparked speculation about further
weakness, perhaps even a devaluation of the CNY.
It would be easy to discount the chatter were it not for the
economic backdrop. GDP has slowed significantly in recent months;
Q3 GDP came in at 9 percent versus an expectation of 9.7 percent
and a Q2 reading of 10.1 percent. Forecasts now call for 2008 GDP
growth of 9 percent on a year-on-year basis; however, that number
is projected to fall towards 7 percent in 2009, with the very real
possibility of only 5 percent growth in the first half of the year.
The government has estimated that GDP growth around 8 percent is
needed merely to employ the additional labor force that is
migrating to the cities from rural areas; numbers below that could
swell the ranks of the unemployed and potentially lead to unrest.
That puts pressure on the government and the People's Bank of China
(PBOC) to do what it takes to maintain GDP growth. In addition, CPI
fell to 2.4 percent y/y in November versus an expectation of 3.4
percent, raising the prospect of deflation; currency weakness is
one of several ways to fight that. Finally, export growth has
collapsed - y/y growth was -17.9 percent in November, down from
15.6 percent in October.
Flows have changed as well; as exports have slowed because of
global economic weakness, the supply of dollars and other
convertible currencies has been reduced. At the same time, local
demand for dollars has soared, in part because of the speculation
about further CNY weakness. Even though trade and foreign direct
investment (FDI) inflows provide a reserve buffer, it is likely
that an attempt by the PBOC to keep the currency stable by
supplying dollars to the local market will drain currency reserves
by a meaningful amount.
The government has recognized that boosting domestic demand is
important at this juncture. Last month's fiscal stimulus package
included subsidies designed to boost domestic rural demand for
household electronics and durable goods. However, given its size,
the export sector is far more critical than domestic demand and
clearly a weaker CNY will help boost exports. Even though the CNY
has been stable to slightly weaker versus the dollar, it had
actually appreciated by over 10 percent on a trade weighted basis
over the six-month period ending in November, caused in large part
by CNY strength versus the EUR.
In my opinion, while it might suit the PBOC and the government to
permit the CNY to weaken further versus the dollar, it will be a
slow process and the percentage decline will be modest. Inducing a
run on the CNY and having to burn reserves to defend the currency
does not make sense. In addition, the Chinese authorities will not
want to provoke protectionist sentiment from the incoming Obama
administration. Finally, this weakness is unlikely to last long if
current broad-based dollar weakness continues. As I say below, I
believe the dollar is likely to undershoot most forecasts. If I am
right, current spot and forward levels may prove to be an
attractive level to hedge CNY payables.
As I had expected, the dollar appears to be firmly on a weakening
trend (1.3360 versus the EUR when this article was written).
However, unlike previous bouts of weakness in recent months, this
is not a reflection of reduced risk aversion. Had that been the
case, the JPY would have weakened and it has done just the
opposite; last Friday's low around 88.50 was the strongest level
since 1995. This move is more about slowing repatriation flows and
the recognition that the U.S. economy is slowing faster and to a
greater degree than earlier forecast. It also reflects the
increased likelihood of more quantitative easing by the Fed - in
other words, using more than the federal funds rate to impact the
economy. By pumping excess liquidity into the system, they increase
reserves in the system and force market yields down, which in turn
reduces the cost of borrowing. Quantitative easing can reduce a
currency's allure, as was the case with the JPY in the 1990s -
yields are low and inflation expectations tend to rise. Finally,
assuming the administration uses TARP funds to bail out the
automakers and avert a crisis as appeared likely at the end of last
week, more USD weakness is in store.
Technically, the EUR's break above 1.30-1.31 opens the way for
1.38 and possibly 1.42. Only a break below 1.30 would postpone the
trend and it would take a move below 1.25 to reverse it. The EUR
has led the way, but virtually all other currencies are rallying,
including Asian and Latin American emerging currencies. The
laggards include the GBP, which is faced with similar circumstances
facing the USD, and many Eastern European currencies, which are
plagued by an economic slowdown, falling reserves and ratings
downgrades. The weakness across most currencies is consistent with
a picture of broad-based USD weakness, as opposed to specific
pockets of currency strength as was the case earlier.
Based on my expectations about future economic growth and Federal
Reserve policy, I have revised my 2009 year-end projections. Here
are some of them: EUR 1.50, GBP 1.75, JPY 95, CAD 1.10, AUD 0.75,
CNY 6.7 and INR 48.
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Two-way Renminbi Risk?October 22, 2012 Posted by: Dave Bhagat
The CNY has been noticeably weaker in December. After spendingseveral weeks around 6.82-6.83, it weakened towards 6.90, beforestrengthening slightly at the end of last week when the dollar lostground to most currencies. In percentage terms, the move isinsignificant, but it has sparked speculation about furtherweakness, perhaps even a devaluation of the CNY.
It would be easy to discount the chatter were it not for theeconomic backdrop. GDP has slowed significantly in recent months;Q3 GDP came in at 9 percent versus an expectation of 9.7 percentand a Q2 reading of 10.1 percent. Forecasts now call for 2008 GDPgrowth of 9 percent on a year-on-year basis; however, that numberis projected to fall towards 7 percent in 2009, with the very realpossibility of only 5 percent growth in the first half of the year.The government has estimated that GDP growth around 8 percent isneeded merely to employ the additional labor force that ismigrating to the cities from rural areas; numbers below that couldswell the ranks of the unemployed and potentially lead to unrest.That puts pressure on the government and the People's Bank of China(PBOC) to do what it takes to maintain GDP growth. In addition,...Read More