USD/CNY forecasts raised to 6.60 over 12 months after PBoC – UBS

FXStreet (Córdoba) – UBS analyst team raised its forecasts of USD/CNY to 6.50 over three, six months and 6.60 over 12 months after People’s Bank of China surprise move to weaken CNY on Tuesday and lowered.

Key Quotes

“The People’s Bank of China (PBoC) guided the CNY lower versus the USD by around 1.9% on 11 August via the official daily USDCNY fixing rate. At the same time, the central bank announced two guidelines for improving its USDCNY daily fixing mechanism”.

“The motivation to change the USDCNY exchange rate regime likely came from the sluggish Chinese economic data in recent weeks, ongoing CNY strength on a trade-weighted basis as well as the IMF’s SDR review in October 2015. Despite the PBoC describing Tuesday’s move as a one-off depreciation, we think the risk of further CNY weakness is high due to two factors. Firstly, as a result of the more flexible USDCNY fixing regime, USDCNY is likely to rise alongside broader USD strength. Secondly, should the PBoC widen the USDCNY daily trading band from +/-2% to +/-3%, USDCNY is likely to temporarily rise towards the band’s new upper end as past episodes have shown. The CNY will be vulnerable to more weakness as capital leaves the country, especially if economic activity continues to point to softer growth”.

“We raise our USDCNY forecasts to 6.50 over three, six months and 6.60 over 12 months (from 6.25 across the horizon previously), but see a risk of the pair rising above these levels should expectations of CNY weakness escalate. From an investment angle, we advise investors to stay sidelined on CNY currency pairs until more clarity emerges in the coming days”.

“For USD-based investors who have CNY exposure, we advise hedging against further CNY weakness over a six-month tenure. Although hedging comes at a cost (i.e. a higher USDCNY forward rate), we think it is worthwhile in view of the market uncertainty. On a broader currency level, we believe the latest move by the PBoC plays into our call of weaker Asia-Pacific currencies going into the rate hike cycle, despite solid current account surpluses and elevated foreign reserves across the region”.

UBS analyst team commented on the People’s Bank of China surprise move to weaken CNY on Tuesday and lowered its forecasts to 6.50 over three, six months and 6.60 over 12 months.

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