USD/CNY likely to trade around 7.15 by end-2017 and around 7.40 by end-2018, says Commerzbank

The CNY has weakened by just below 4 percent against the USD since its inclusion into the basket of the Special Drawing Rights. This has led to certain worries about whether the Chinese yuan would collapse as capital outflow is deepening, noted Commerzbank in a research report.

But this case is pretty unlikely. Firstly, the official CNY index has stayed comparatively stable that implies that the CNY softness shows the general weakness of the U.S. dollar. Secondly, the Chinese foreign exchange reserves have declined in the last four months. It has dropped to below the psychological level of USD 3 trillion at the end of January. This explains the People’s Bank of China’s active interventions to smoothen the volatility in the market.

Controlled depreciation of the Chinese yuan is expected to continue to be the central issue for CNY for the near future. According to Commerzbank, the USD/CNY pair is expected to trade at around 7.15 by the end of 2017 and at around 7.40 by the end of 2018.

Meanwhile, China might become subject to a downgrade of sovereign credit rating in the quarters ahead, according to a Scotiabank research report. Standard and Poor’s affirmed China’s “AA-” rating with a “negative outlook” in January. It underlined the economy’s resilience on credit-fuelled growth that might soften its resilience to shocks and lower the government’s policy options.

Fitch and Moody’s have rated China in the “A+” and “Aa3” categories respectively, noted Scotiabank. Moody’s has also assigned a “negative” outlook to the rating. Confidence toward China is expected to stay volatile in the months ahead, hit by the constant outflow of capital, housing market risks, corporate debt overhang, authorities; interventionist policies and uneven structural reform progress, added Scotiabank.