Nomura on Chinese yuan weakness, 7.50 is not far away!

Craig Chan, global head of FX strategy at Nomura spoke on Bloomberg TV. He discussed the yuan and what measures the PBOC can use to support the currency.

I pulled out some of the key points, it was a good piece covering a lot of ground. I’ve typed it out below without much formatting for neatness … just the points!

  • 7.50 actually isn’t
    that far from where we are here.
  • There are a lot of headwinds, partly
    on the macro side, also from the global side
    where we see the long dollar carry trade remain pretty much intact as well
  • Capital flow
    dynamics, it’s very clear to us that there is significant weakness, coming from:

    • equity outflows,
    • foreign bond outflows,
    • even
      corporates that are hoarding their US dollars and not bringing them back into
  • there’s a lot of negativity that’s
    continuing to brew
  • there’s a lot of measures being taken to try and limit
    the depreciation of currency. When you look historically, whenever we see these pressures come through, is China successful in using the current toolset that they have to actually stop
    depreciation? I think not.
    I think what we need is a fundamental change.
  • China macro outlook needs to change to more positivity via more stimulus, or we
    need the dollar backdrop to change; we need the long dollar carry trade to
    actually unwind. These don’t look likely.
  • There’s still other other tools they can use
    • FX RRR cuts
    • penalizing FX forward positions
    • they have been utilizing the fixing
    • apparent conversations in the market
    • been using liquidity tightening
      measures as well to try and squeeze out long dollar positions in the
      markets also
  • There’s still things they can use and
    they can continuously use. But the point is, is that these are not
    trend changers.
  • You start thinking about controlling
    capital that’s going in and out of China, this is another problem because
    clearly it can create an environment that people actually get more and more
    concerned that we’re going to be moving into a sharper depreciation period ahead
    and that that’s exactly what you don’t want to do

    • volatility is relatively low
    • Capital outflows are negative, but they’re not significant.
      There’s not this period of substantial, uncontrollable capital flight that we’re
  • So I guess with the macro weakness
    you’re having with it, if you want to use a multi-pronged
    approach, you should allow the currency to weaken somewhat.
    And I think that’s ultimately what will happen.

This article was written by Eamonn Sheridan at Source