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Yuan Fluctuation

In: Business and Management

Submitted By kevin10786
Words 1139
Pages 5
Investment Research — General Market Conditions

18 October 2010

Research China
Fighting a defensive war


In the militaristic language of the currency war, important battles are looming ahead in connection with the G20 meetings. China will, in our view, be fighting a defensive war and will make a tactical retreat in order to avoid a devastating war that it might have to fight alone and where everybody loses in the end. Hence, China will probably maintain current momentum in the appreciation of the yuan in the coming months to convince its G20 partners that it is fulfilling its promise from the previous G20 meeting to gradually increase the yuan’s ‘flexibility’. The outcome of the G20 meetings is unlikely to be a comprehensive agreement with a firm commitment from China and other Asian countries to let their currencies appreciate in a co-ordinated fashion, even though this would be the most positive outcome for the global economy. The current inflation in China and the weak US dollar suggest that China will let the yuan appreciate by about 7% annually. We expect a large part of this appreciation to be front-loaded in the next three months to maximise the political payoff for China. The market currently discounts a 3.5% appreciation over the next 12 months. Hence the appreciation pace of the yuan is expected to be substantial in the coming months. It will probably be enough to ease political tensions between the US and China and will prevent punitive legislation against Chinese imports. With China expected to maintain the current momentum in the appreciation of the yuan in the coming months and the Fed and other central banks most likely to boost quantitative easing further, we think Asian currencies will continue to appreciate as long as substantial risk aversion does not return to financial markets .

Forecast for CNY

EUR/CNY
15-Oct +3M +6M +12M

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