Chinese yuan to reverse weakening trend, rupee seen easing as dollar rallies

Published Fri, Feb 6, 2015 · 08:00 AM

[BENGALURU] The Chinese yuan will reverse its recent weakening trend and appreciate over the next year due to the country's large trade surplus, despite expectations that its central bank will ease policy further, a Reuters poll showed.

The yuan has lost about 2 per cent against the dollar since November when it broke an appreciating trend after the People's Bank of China unexpectedly cut interest rates. On Friday, it was trading at 6.241.

China's economy grew at its slowest pace in 24 years in 2014 and will likely cool further to around 7 per cent this year, even with additional stimulus, weighed down by a cooling property market, industrial overcapacity and slowing investment.

The PBOC on Thursday cut the reserve requirement ratio by 50 basis points to increase liquidity in commercial banks, its first system-wide cut in over 2 years, in an effort to offset capital outflows.

However, the poll of around 20 currency strategists taken this week showed the yuan will soon shrug off those losses and climb to 6.23 per US dollar in three months, 6.20 in six months and 6.15 in a year.

"China's economy will probably stabilise this year owing to a very gradual export recovery, which will keep the trade surplus fairly large," said economist Vishnu Varathan at Mizuho.

"That means at some time this year policymakers will be under pressure to allow the currency to appreciate."

China's December trade data beat expectations and exports grew faster while imports shrank. But whether that can be sustained is doubtful, especially if the recovery in the United States falters.

The US Federal Reserve is widely expected to increase interest rates for the first time in over half a decade in June despite low inflation, and will likely push Treasury bond yields higher, offering better returns to investors.

That is expected to propel the dollar and pressure Asian currencies as growing expectations of monetary policy easing across the region counter a tightening cycle in the world's largest economy.

A Reuters poll of traders on Thursday showed investors raised short positions on the yuan over the past two weeks to the highest in nearly 10 months, while sentiment was largely optimistic on the Indian rupee and long positions fell only slightly.

The rupee is among the best performing Asian currencies so far this year, with a gain of around 2 per cent, supported by capital inflows and expectations the Reserve Bank of India will ease policy to encourage growth.

The RBI cut interest rates in a surprise move last month to take advantage of cooling inflation and support an economic recovery. Analysts expect it to follow with 25 basis point cuts in the repo rate in each quarter from April.

The latest currency poll showed the Indian rupee will likely trade near Friday's rate of 61.73 through the end of February before falling to 63.00 around July on expectations that a dollar rally will limit the currency in the second half of 2015.


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