Downward pressure on CNY likely to persist and extend into 2017, says Scotiabank

The downward pressure on the yuan will persist and extend into 2017 amid continued capital outflows. China’s foreign reserves tumbled USD 69.1 billion to USD 3.0516 trillion at the end of November from a month ago, the most in 10 months.

The CFETS, the central bank arm that runs China’s interbank foreign exchange market, said Tuesday that the yuan "has conditions to remain basically stable at a reasonable and equilibrium level." In the rest of this year, CFETS RMB Index can be expected to stay in a range with a soft support level of 94 to avoid fuelling market fears over competitive currency devaluations., Scotiabank reported.

In the event of a broadly strengthening dollar, CFETS RMB Index is more likely to rise as the PBoC would certainly step in to curb over-speculation about the yuan depreciation. In addition, nward pressure on the CNH escalates particularly ahead of major

FOMC meetings at which the Fed may raise its benchmark interest rate, as rising funding costs of the CNH could contain market speculation on the yuan depreciation. China’s authorities will further tighten controls on cross-border outflows including ODIs and RMB outbound flows, while encouraging capital inflows. In November alone, the SAFE approved USD 1.97bn of QFII quota and RMB 8.79 billion of RQFII quota.

"We would buy dollar/yuan on dips and expect USD/CNY to reach 6.85 and 7.20 respectively at the end of 2016 and 2017," the report said.