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The Chinese yuan which suffered big selloffs in the second half of 2016 might actually strengthen in the first half of 2017 if the dollar weakens across the board. There is a strong possibility that faced with a strong dollar, and uncertainties with regard to the fiscal policies under Trump administration, the US Federal Reserve might actually move to a wait and watch mode and not raising interest rates until June.
The dollar, performing strongly after Donald Trump’s win struggling to find the next catalyst to push higher as the rate hikes from the Federal Reserve since 2015 have been much lower than expected. Even if the Fed moves ahead with three rate hikes in 2017, the federal funds rate would actually be much lower than its own forecast dating back to 2014, at the end of asset purchase program.
While the Fed constantly lowered its forecast for rates since then, the dollar has found support from the easing policies pursued by other central banks; however, the recent spark in inflation globally is threatening that support for the dollar.
So a reluctance from Fed to follow on to its December hike as early as April might actually prove tumultuous for the dollar and the yuan which is being supported by People’s Bank of China’s (PBoC) intervention could gain to as high as 6.62 per dollar. The yuan is currently trading at 6.897 per dollar in the onshore market and at 6.85 per dollar in the offshore market.
