31 May 2018
Why we’re forecasting the yuan to depreciate

Even though concerns about depleting foreign exchange reserves could limit the extent of yuan weakening, a depreciation trend is more likely than before. That's why we're changing our USD/CNY forecast to 6.60 for 2018 from appreciation to depreciation 

Why China will be more willing to take advantage of a stronger dollar

Trade war escalations between China and the US along with rising political risks in Italy and Spain have formed a strong dollar trend, and this is the key reason why we're revising our yuan forecast. 

A strong dollar is likely to create headaches for the US administration as this won't help narrow its trade deficit with China. As the greenback strengthens against most major currencies, China should be willing to allow a weaker yuan as it sends a signal to the US that the exchange rate movements are largely a result of a steep dollar rather than any manipulation by China. 

In other words, this means China is being passive ending up with a weaker yuan against the dollar. This passive influence by the strong dollar makes us think a slight depreciation of the yuan against the dollar is more likely than we previously believed, even though we thought this was unlikely.

China’s Xi speaks, Trump reacts

Tensions over a US-China trade war are far from over. On 28 May-before the US announced possible tariffs on Chinese imports and a control list on investments and exports to China- President Xi Jinping made a high-level speech about the need for China to be self-reliant on high-tech products  

The timing of President Xi's speech plays an important role in forthcoming trade negotiations

President Xi Jinping’s speech on 28 May emphasises building a self-sustained high-tech industry. We think the speech plays an important role in the China-US trade war. 

  • First, the speech was made by President Xi himself, suggesting the objective of building a self-reliant high-tech economy is concrete with a high chance of success given Xi's power of execution. 
  • Second, the timing of the speech is significant. It was given before the US administration announced a list of tariffs on Chinese goods (on 15 June) and a list of investment and export controls on high-tech products into China (before 30 June).  
India: Weak rupee to push RBI to tighten next week

An accelerated currency depreciation trains the market focus on the Reserve Bank of India’s (RBI) forthcoming policy meeting on 6 June. We expect the RBI to tighten with a 25bp policy interest rate hike

Will the Reserve Bank of India follow its emerging markets counterparts in raising policy interest rates to curb the currency depreciation? We believe it will. We bring forward our forecast timing of the first 25bp policy rate hike to June from August, taking the repo rate to 6.25% and reverse repo rate to 6.00%. However, absent any policy support next week another downgrade of our USD/INR forecast, currently, 68.3 for end-2018, will become inevitable (spot 67.5).

Thailand’s central bank signals steady policy

We continue to forecast no change to the Bank of Thailand monetary policy this year. We see the current global market turmoil pushing USD/THB to 32.50 in the near-term

The central bank policy minutes back up our long-held view that there will be no change to monetary policy this year. We expect the current global markets stress to push the Thai baht (THB) exchange rate versus the US dollar, currently 32.14, to 32.50 in the near-term.

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Good MornING Asia - 31 May 2018

It seems odd, but the Italian coalition government markets once most feared is now deemed preferable to another election

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