Chinese yuan to remain under depreciating pressure against US dollar, USD/CNY to trade around 7.00 by end-2017

The Chinese yuan is expected to stay under moderate depreciating pressure against the U.S. dollar, according to a Scotiabank research note. This is due to the constant, yet gradual capital outflows from China and the fact that market forces are playing a more vital role in determining the value of currency.

With the significant foreign reserves totalling USD 3.12 trillion in October, the Chinese central bank, People’s Bank of China is able to interfere effectively to curtail the depreciation of Chinese yuan. The USD/CNY currency pair is expected to trade at around 7 by the end of next year, added Scotiabank.

Meanwhile, perception of China’s sovereign credit worthiness is softening. Standard and Poor’s and Moody’s had given ratings of “AA” and “Aa3”, respectively to China in March of this year – a “negative” outlook on the back of a rather slow progress on the rebalancing of the economy, noted Scotiabank. Fitch has given the rating of “A+” with a “stable” outlook.

Sentiment towards China is expected to stay volatile in the months ahead, on back of corporate debt, developments in the housing market, structural reform progress, intervention by authorities and worries about industrial over-capacity and economic growth.

China’s 5-year credit default swap has risen 15 basis points to 125 bps since the start of November, reflecting elevated risk aversion toward emerging markets.