FXStreet (Delhi) – Research Team at ANZ, notes that since the decision was made on 30 November 2015 to admit RMB into the IMF’s SDR basket, the yuan has been weakening not only against the USD but also on a basket basis.
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“But given the spillover effects that this is having, we suspect that the authorities are set to use the same playbook as the post-August devaluation period. That is, when the currency adjustment causes sentiment towards RMB to become too bearish, the authorities attempt to stabilise the currency for a period of time.
Such a strategy is not ideal, but Chinese policymakers face a delicate balancing act in engineering looser financial conditions to support growth, while at the same time preventing large capital outflows and the associated spillover into financial markets generally. And as we have seen during the August devaluation last year and earlier this year, what happens to RMB has a flow-on effect on global markets. It may be the Chinese people’s currency, but it is now also the world’s problem.
Given growth and deflation risk in China, we still expect further RMB weakness ahead (our current year-end forecast is 6.65 for USD/CNY). But for now, the authorities will want to maintain currency stability in the near-term, in our view.”
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