Small Probability of Sharp Yuan Depreciation Despite Possible Fed Rate Hike, UBS Says
Yicai Global
/SOURCE : Yicai
Small Probability of Sharp Yuan Depreciation Despite Possible Fed Rate Hike, UBS Says

(Yicai Global) Oct. 10 -- Despite the threat of an imminent rate hike by the US Fed, stable macroeconomic data from China shows that there is little probability of a sharp devaluation of the Chinese yuan in the short term, Mr. Chen Deneng, a currency strategist with investment bank UBS AG, said.

China's central bank's strong exchange rate policies and its strict regulation of capital outflows are maintaining investor confidence, he said. He expects the dollar-yuan exchange rate to rise to 6.8 within six months and to 7 within the next year.

The upcoming US presidential election in November is another major concern, Mr. Chen stressed. If Mr. Donald Trump wins the election, the emerging risk-averse sentiment is expected to pose great pressure on currencies in the Asia-pacific region. The safe haven currency of the Japanese yen and the low-volatility currency of the Chinese yuan will have the strongest capacity to resist depreciation. Meanwhile high-volatility currencies such as the Australian dollar, New Zealand dollar and South Korean won and export-oriented currencies such as the Singapore dollar, Malaysian ringgit and Thai baht will be most vulnerable.

Mr. Trump has claimed that should he win the election, he would immediately impose trade sanctions on China to narrow the US-China trade deficit. Should this occur, the decline in China's exports will bring concerns about economic growth. In addition, if China is forced to reduce intervention in foreign exchange in the face of capital outflows, then the yuan may well weaken even faster.

It is unlikely that an all-out trade war between the world's two largest economies will take place though, he added.

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