world growth

world growth

Sunday, July 31, 2011

Chinese yuan predicted to rise 4 percent over coming year

Yuan will rise steadily in this decade.

- The Chinese yuan will rise 4 percent against the dollar in the coming 12 months, making it the strongest performer among the BRIC country currencies, according to the latest Reuters poll.

As the Chinese economy expands with rising foreign exchange reserves, the yuan, also known as the renminbi, is set to extend an uninterrupted rise since it was de-pegged from the dollar just over a year ago.

A poll of 36 strategists and analysts, taken mostly before the People's Bank of China (PBOC) raised interest rates for the third time this year on Wednesday, showed the yuan trading at 6.40 in three months, 6.30 in six and 6.20 in 12 months.

That compares with 6.45, 6.38, and 6.24 in the previous quarterly BRIC FX poll.

BRIC countries have emerged as important players in the global economy, providing a ballast when developed economies plunged in the wake of the global financial crisis.

But that prominence has attracted a flood of investment from abroad in recent years, making national currencies expensive and threatening export markets.

"The (Chinese) currency is on a clear medium-term appreciation trend," said Robert Minikin, a senior foreign exchange strategist at Standard Chartered in Hong Kong.

He added that China may widen the trading band between the yuan and the dollar in the onshore market soon, in an effort to make the exchange rate more flexible and market-based.

But China, the world's largest exporter, is unlikely to conduct another "one-off" revaluation or allow sharp appreciation in the yuan.

Lu Zhengwei, chief economist for Industrial Bank in Shanghai, said using a rise in the yuan to fight imported inflation could backfire as it might encourage speculative capital inflows and push up prices further.

The PBOC raised the benchmark lending and deposit rates by 25 basis points each on Wednesday in an effort to tame rampant inflation despite clear signs growth is easing.

China's central bank is set to raise rates once more this year, according to a snap Reuters poll on Thursday.


The Brazilian real has been the hottest currency of the four in recent months, having jumped more than 6 percent since the beginning of the year to reach a 12-year high of1.552 per dollar on July 4.

The Reuters poll found the real was expected to remain broadly unchanged at 1.57 by the end of July, then slip to 1. 60 in six months. In 12 months it will fall to 1.63, nearly 4 percent weaker than current levels.

However, that is a stronger outlook compared with the April BRIC FX poll. A $600 billion U.S. Treasury bond purchase program, known as QE2,has flooded world markets with capital and caused the dollar to weaken. The program ended on June 30.

Some of that money has been invested in Brazil, where the 12.25 percent benchmark rate and a growing economy offer much better returns than near zero interest rates in the United States and some other developed economies. Estimates for the real are based on how quickly investors and economists expect the liquidity injected into the financial system from QE2 to be drained and how fast U.S. interest rates will rise.

The latest consensus shows U.S. rates won't rise until well into next year but not everyone is convinced.

"I think we can start seeing ... a pick-up in U.S. rates in three to six months," said Andre Ferreira, a partner at Futura Corretora, a Sao Paulo currency brokerage which expects the real to weaken to 1.65 by the end of the year.

Those who disagree on the value of the real, agree on where responsibility for changes lie. "The market is totally focused on U.S. liquidity and interest rates," said Diego Donadio, currency and interest-rate strategist at the Sao Paulo unit of BNP Paribas.

"We don't expect the U.S. to raise rates and reduce liquidity until sometime in 2012 and until that happens there is little that can happen to cause the real to seriously weaken." Donadio expects the real to strengthen marginally to 1.55 in 12 months. Few fear government threats to take measures to weaken the currency. President Dilma Rousseff faces rising political pressure to prevent the real's gains from undermining the competitiveness of Brazilian manufactured goods in export markets.

The strong real has flooded the country with imports and slowed export growth for most products except oil, iron ore , soybeans and other commodities and low-value goods.

A government source told Reuters on Wednesday that Brazil is considering new measures to weaken the real. [ID:nN1E7650T 5] But previous efforts in April to slow the flow of speculative capital to Brazil were shrugged off and the real was driven to new highs.

Foreign bets the real will gain further have also risen to new records, spurred in part by an increase in investment from Japan, where rates are also low and growth sluggish.

The poll found the partially convertible rupee would rise by around 1.0 percent against the dollar in the coming year, helped by strong foreign fund inflows into the domestic share market.

The Indian rupee is seen trading at 44.50 against the dollar in one month, 45 in three and 44 in 12 months. These medians are almost unchanged from a poll taken three months ago.

The dollar is also likely to be under pressure in coming months which is seen helping the rupee, traders said. On Thursday, the rupee was trading around 44.40 to the dollar.

"We expect the current slowdown in the global economy to be a temporary soft patch," said Sonal Varma, an economist with Nomura in Mumbai.

"Strong goods exports, rising software exports, strong remittances and rising foreign direct investment and external commercial borrowing inflows should all help the rupee gain over the next 12 months."

The Russian rouble is expected to appreciate slightly against the dollar in the near term before returning to present levels of around 28.2 this time next year.

Against the euro, the rouble is set to rise by more than 2 percent in the next 12 months to 39.22.

Russia's central bank bought $3.23 billion and 0.54 billion euros ($772.4 million) in June in its forex intervention s, aimed at curbing volatility, central bank data showed on Thursday.

No comments: