Expect a weaker CNY as the capital account is liberalized – BAML

FXStreet (Barcelona) – The BofA-Merrill Lynch Team explain that PBoC easing, slow growth, the liberalization of the capital account for SDR entry, and outflows will lead to a weaker CNY, which in turn will be positive for the dollar.

Key Quotes

“Monetary easing, capital account liberalization for Special Drawing Rights (SDR) entry, capital outflows and sluggish GDP growth will put downward pressure on the CNY. In our base case, CNY depreciates 5-10% over the next 12 months. However, we do not expect the Chinese government to use CNY devaluation to stimulate growth. Doing so would trigger competitive devaluation across the region, undermine the stability of China’s financial markets and hurt growth. From a long-term equilibrium perspective, our Compass model finds the CNY fairly valued.”

“A weaker CNY would be positive for the USD against other major currencies as US trade is less exposed to China than Germany’s and Japan’s are. We expect a limited impact on UST as China’s demand has diminished at the margin but reserve managers have diversified into UST in search for higher yields and expecting a stronger USD.”

The BofA-Merrill Lynch Team explain that PBoC easing, slow growth, the liberalization of the capital account for SDR entry, and outflows will lead to a weaker CNY, which in turn will be positive for the dollar.

(Market News Provided by FXstreet)