We have now updated our thoughts on CNY for the 2nd half of the year. These are below:
If there was one currency pair that was in the crosshairs of a newly elected President Trump it was USDCNY. However, the inability of the Trump White House to advance its policy agenda on healthcare, taxes, regulation and trade has almost entirely cancelled out the dollar’s politics-inspired rise earlier this year. With hindsight, we – like many – were perhaps unprepared for just how chaotic a Trump Presidency could actually be.
In one of his many policy U-turns President Trump said that he will not brand China a ‘currency manipulator’ as well as commenting that the USD was too strong – he told the Wall Street Journal, “partially that’s my fault because people have confidence in me. But that’s hurting – that will hurt ultimately.”
While North Korea remains a geopolitical tinderbox, we see the chatter on currency manipulation being a non-factor. In any case, it is not the Chinese who should be worried by these moves however with both Korea and Taiwan seen as more earnestly interfering with their currencies.
Of course not all of the weakness in USDCNY has come from weakness in the US dollar as there have been notable forces on the yuan as well, chiefly that monetary conditions have tightened within the country in an effort to press down on an increasingly worrying-looking credit bubble.
The first half of the year saw the first downgrade to China’s debt pile for the first time since 1989. The ratings agency took action over fears over the amount of debt within the economy and the burden that will mean for the finances of the world’s second largest economy.
“Moody’s expects that economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow, but not prevent, the rise in leverage,” the rating agency said in a statement. “The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole.”
These predictions outline the high, low, median and mean expectations for the above currency pair as found by a Bloomberg survey of banks and brokers and should only be used for illustrative purposes. Source: Bloomberg
Any increased stimulus will stop the yuan from accelerating too much but we see that as a very low possibility event through the second half of 2017. As we can see from the genesis of where the market believes that USDCNY will continue to trade to the high side continues to remain increasingly optimistic with the median estimate still around the 7.00 level. We see that as about right with a cap in at about 7.08.
Conclusion: Back towards 7.00 but weakness in Washington will continue to delay these moves.
We have spent a large part of 2016 having our gaze being drawn away from China courtesy of the European and US political maelstrom that has enveloped markets. That is not to say that 2017 will be any different; elections in the Netherlands, France, Germany and possibly in Italy will keep focus squarely on the European continent.
2017 will see President Elect Trump in the White House however. His rhetoric on the campaign trail and since winning the election has been aggressive on trade and he has maintained a defiant stance of renegotiation of trade ties, tariffs and taxes under the banner of Making America Great Again. With the best will in the world we are still a long way from knowing what trade policy from Trump will really look like.
Indeed we believe that Trump’s first 100 days as President are likely the most important first 100 days of a Presidency since World War Two. Within these first three and a bit months we will find out just how chaotic or conjoined policy decisions are likely to be and how much support he has from Congressional Republicans.
On the campaign trail Trump threatened to label China as a currency manipulator on his first day in office. He can do this unilaterally provoking an instant 15% tariff on Chinese goods into the US for a period of 150 days. We would wager that such a measure would lead to a modicum of reprisal from Chinese authorities (sales of iPhones for example) and damage would be wrought on both economies.
Once again we have little knowledge about Trump’s willingness to doggedly pursue these reforms once in office and risks remain that China will feel the need to meaningfully stimulate their economy via both additional fiscal spending and looser monetary policy despite concerns over their longer term effects.
The People’s Bank of China will be, alongside the Federal Reserve, the most important central bank in 2017. The manipulation and movements of the yuan will be crucial to how well China weathers any trade or Trump driven storm. The final few months of 2016 have seen the RMB lose around 3% of its value against the US dollar. We anticipate this to continue in 2017 with a breach of 7.00 in USDCNY in Q1.
A higher USD is bad for the RMB for many reasons but the key driver remains market expectations of a collapse in the spread between US and Chinese interest rates as the Fed deals with Trump driven inflation and the Chinese keep things loose to stave off any damage to growth.
Allowances to opening up the Chinese economy have increased the speed at which money is leaving the Chinese economy. Investment diversification by both Chinese corporations and private investors will continue as well although inclusion of Chinese equities, bonds and indices on global measures such as MSCI will help balance this.
We think Chinese GDP will stay at or around the 6.5% mark in 2017 as lower trade numbers remain balanced by higher investment figures. We anticipate no change in interest rates and only assign a low possibility to a change in borrowing availability via the Reserve Requirement Ratio given concerns over credit levels.