(Bloomberg) -- Seven banks have slashed their yuan forecasts with the currency headed for its biggest monthly decline since China unified its exchange market in 1994.
Analysts from Credit Agricole CIB, to HSBC Bank Plc have lowered their estimates for the yuan recently as the worsening Covid outbreak and spreading lockdowns lead to declines of more than 4% this month. Some of the bearish projections were swiftly breached Thursday as the yen's slide added to the depreciation pressure. Separately, a survey of 11 traders and analysts by Bloomberg show the yuan is expected to drop to 6.7 per dollar in three months, about 1% weaker than current levels.
Yuan's turnaround came just months after China sought to tame its strength as Covid lockdowns fan fears that the nation will miss its economic target with even the capital Beijing battling an outbreak. While the central bank and policymakers have pledged to step up support, Chinese markets are tumbling, raising the specter of accelerating capital outflows.
“I don't think this is an end to recent yuan depreciation,” said Bo Zhuang, senior sovereign analyst at Loomis Sayles Investments Asia in Singapore, who raised concerns of a possible hard landing should a lockdown grip Beijing. He forecasts the yuan weakening to 6.85 per dollar this year, with a potential to hit 7 next year.
Morgan Stanley and other banks have cut their China growth forecasts to below the official projection of 5.5% for the year. Early indicators compiled by Bloomberg show domestic demand worsened in April while business confidence also plunged.
The onshore yuan fell below the 6.6 per dollar level on Thursday for the first time since November 2020. HSBC and BNP Paribas SA had predicted the currency would breach that level by the end of June while JPMorgan Chase & Co. had forecast it surpassing that point by year-end.
Standard Chartered and Credit Agricole forecast it at 6.70 by the second quarter while Bank of America Corp. and TD Securities see the currency falling to 6.80 by year-end on worsening terms of trade. At the end of March, analysts surveyed by Bloomberg expected the currency to be at around 6.38 by the end of the second quarter.
The onshore yuan has fallen 4.3% so far this month to 6.6107 per dollar while the offshore unit fell 4.6% over the same period to 6.6438.
“The yuan's outlook is heavily dependent on the evolving Covid and growth situation in China,” said Alvin Tan, head of Asia currency strategy at the Royal Bank of Canada in Hong Kong, “It makes sense to use controlled currency depreciation as a relief valve for the economy if growth risks were to escalate.”
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Measured Support
The PBOC's measured approach toward supporting the yuan is also evident from its restraint in using the daily reference rate as a signaling tool.
It set the reference rate 36 pips stronger than the average estimate in a Bloomberg survey Thursday after setting the fix broadly in line with forecasts so far this week. On Monday, the central bank cut the amount of money that banks need to have in reserve for foreign currency holdings to increase yuan liquidity.
“I prefer to view the PBOC moves as managing exchange rate volatility rather than targeting an exchange rate level or view them as attempts to reverse a trend,” said Philip Wee, senior foreign exchange strategist at DBS Bank Ltd in Singapore
The PBOC has various tools at its disposal to boost the yuan. It could use currency fixing, squeeze offshore yuan shorting costs and further cut the reserve requirement for foreign currencies, according to the Bloomberg survey participants.
The central bank could also limit foreign outflows and foreign currency purchases onshore, said the traders and analysts who asked not to be identified as they aren't authorized to speak publicly.
©2022 Bloomberg L.P.
With assistance from Bloomberg
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