The Chinese yuan is expected to weaken mildly against the greenback, touching almost a level of 7.10 by the end of this year.
Despite various administrative measures to reduce capital outflow pressures, the tendency remains towards more outflows which are not being matched by inflows at this stage. The authorities have been trying to maintain a stable RMB Index but this is resulting in falling FX reserves.
The PBoC has raised money market rates twice this year by a total of 20 basis points which we see as a precautionary move to stabilize the exchange rate.
"We expect the authorities to eventually allow the currency to adjust in order to prevent further erosion of their FX reserves. However, the depreciation path will be gradual," ANZ Research commented in its recent research report.
