China's yuan to weaken further as U.S. dollar rallies, economy cools: Reuters poll

By Sumanta Dey

BENGALURU (Reuters) - The Chinese yuan is expected to weaken around 2.5 percent over the coming year as the dollar rallies on expectations of U.S. interest rate hikes and as China's central bank sets lower mid-points for its mostly-managed currency, a Reuters poll found.

The yuan posted its second-biggest monthly fall on record against the dollar in May, highlighting Beijing's willingness to allow its currency to weaken and reflecting a resurgent dollar as Federal Reserve policymakers put the prospect of a rate hike on the table as early as this month.

Concerns about China's opaque currency policy were one of the factors behind a global financial market rout at the start of the year when it deliberately weakened the yuan, leading investors to flee emerging markets fearing similar competitive devaluations by other central banks.

The yuan has since stabilized and the PBoC has juggled its fixings both higher and lower to avoid speculation. It appeared to reverse course on Monday by setting the softest mid-point against the dollar since 2011, but then fixed the yuan higher on Thursday for the first time in four days.

The median view from almost 60 currency analysts polled by Reuters this week is for the yuan to trade around 6.60 per dollar by end-June, slightly lower than 6.58 on Thursday.

It was expected to ease steadily to 6.69 by end-November and 6.75 by end-May 2017.

In last month's poll, the twelve-month consensus was 6.72.

"It's possible the acceleration of USD/CNY's upward pace reflects a short-term change of tack by Chinese officials seeking a weaker renminbi faster," said Sook Mei Leong, analyst at BTMU in Singapore.

"If so, that seems a risky game to play. The risk exists as we do not think officials have decisively addressed issues of economic weakness nor of troublesome debt and we'd advise watching capital outflows more carefully in the coming months."

A separate Reuters poll last week showed pessimistic bets on the yuan were at its highest since early February, even as China's FX reserves rose in March and April, suggesting Beijing was easing off currency market interventions as outflows eased. [ASIA/FXP]

Chinese stocks are already the region's worst performers this year, down almost 20 percent, and concerns about the health of the world's second-largest economy will likely prove a drag on investments flowing into Asia.

Factory activity remained weak in May amid soft demand, suggesting a quick recovery is unlikely. While fears of a hard landing for the economy have ebbed, concerns about growing debt levels and systemic risks to the country's financial system have moved high up on investors' worry lists.

Hopes of further rate cuts by the PBoC have also faded amid lingering outflow concerns and signs that Beijing may be changing tack on its economic stimulus efforts, ramping up fiscal spending instead, including a flurry of major infrastructure projects.

In the absence of a shift in China's monetary policy, the Fed's policies will drive the yuan, as they will be the primary driver of most other currencies in the world, analysts said.

Fed Chair Janet Yellen said on Friday that higher rates were appropriate in "coming months" if economic growth and the labor market keeps improving.

A majority of economists polled by Reuters last month said a hike would not come until September, but several policymakers have since weighed in to suggest rates are likely to rise this month or next, a risk backed up by minutes to the April meeting.

INDIA'S RUPEE MORE RESILIENT?

The Indian rupee , meanwhile, is expected to perform better despite a continued dollar rally.

The poll showed it would trade at 67.48 per dollar in one month, 68.17 by end November and 67.63 in a year. On Thursday it was around 67.30.

However, quite a few strategists predicted the rupee would fall below 68 per dollar in a year, with the most pessimistic view was at 71.66.

Yuna Park at Dongbu Securities said emerging currencies remained vulnerable to a Fed rate hike over the coming two months, but volatility won't be as intense this time around on expectations the Fed will move very gradually on rates.

That, she added, should help drive "global money inflows into Indian assets."

India gathered momentum from January to March to extend its lead as the world's fastest growing large economy, helping Prime Minister Narendra Modi craft an impressive sales pitch for meetings with investors in the United States next week.

Modi's pro-growth policies helped gross domestic product grow a faster-than-expected 7.9 percent year-on-year in the March quarter, faster than the December quarter's 7.2 percent.

(Additional reporting and polling by Shaloo Shrivastava; Editing by Ross Finley and Kim Coghill)