Chinese yuan seen depreciating further; rupee to remain stable

[BENGALURU] The Chinese yuan will weaken further over the next 12 months as policymakers ramp up efforts to support the economy through further stimulus or another currency devaluation, a Reuters poll found.

The People's Bank of China sent shockwaves through global financial markets on Aug 11 by devaluing the currency by nearly 2 per cent, triggering fears of a currency war.

Though policymakers have repeatedly tried to reassure markets since then that they see no reason for further declines, many traders believe there is political pressure for a deeper depreciation as the world's second-largest economy slows.

The renminbi is expected to weaken another 2 per cent in six months and the poll of 30 currency strategists showed it will trade at 6.50 to the dollar by end-November and 6.52 by end-February, before recovering to 6.46 in a year from now.

Those estimates are lower than a poll last month and come on the back of expectations of further easing from the central bank. The PBOC has already cut lending rates 5 times since November in the hopes of reigniting the economy.

"There is definitely need for more liberalization for the currency and we think given the economic circumstances, once the currency has more room to float for the time being it will be on the weaker side," said Martin Gueth, strategist at LBBW.

"In comparison to Asian currencies, the Chinese renminbi was really strong. Therefore, given the economic problems, we see the need for further devaluation of the currency to regain some competitiveness."

A few analysts in the poll were more pessimistic than the consensus and predicted the yuan will dive to 6.80 in 12 months from around 6.35 on Friday.

The PBOC described the Aug. 11 move as part of its currency reform efforts, but many investors felt it reflected Beijing's increasing concern over weak exports and the slowing economy.

China's exports, which fell 8.3 per cent in July year-over-year and are expected to fall 6 per cent again in August, will surely get a boost from a weaker exchange rate.

But in the past deliberate attempts by central banks of many emerging and developed economies to weaken their currencies has threatened to sparked a race-to-the-bottom which could disrupt global trade.

China figured as the biggest risk among 50 analysts in a separate poll this week and concerns that it may allow its currency to weaken further will haunt emerging market currencies for some time, analysts said.

The Indian rupee, on the other hand, is expected to rise slightly over 1 per cent in a year, as investor inflows into the economy offset the impact of an expected hike in interest rates in the United States.

The Federal Reserve could start raising rates as early as this month, though some analysts believe it will wait a bit longer to see if China's slowdown and recent global market turmoil impact US growth.

The rupee has weakened around 3 percent to its lowest in two years in the immediate aftermath of the yuan devaluation last month as investors fled emerging markets.

But it is expected to trade at 65.83 to the dollar by end-November, 65.73 by end-February and 65.60 in a year, from Friday's 66.40.

"The rupee is facing a depreciating bias as India's weaker-than-expected second quarter growth is increasing the likelihood for further monetary easing by the Reserve Bank of India," Tuuli McCully, analyst at Scotiabank wrote in a report.

There is a 60 percent probability the RBI will cut interest rates when it meets on September 29, according to the median consensus on economists in a poll.

REUTERS