Economists split on outlook for Chinese yuan following central bank announcement

Economists were left somewhat divided as to the outlook for the Chinese currency, the yuan, after the country´s central bank indicated it would begin to calculate and track its value versus a basket of currencies instead of just the US dollar.

On 11 December, the People´s Bank of China posted an editorial on its website from the China Foreign Exchange Trading System with the details of a new official trade weighted index.

Such indices assign weights to the different exchange rates vis-a-vis a country´s different trading partners and then calculate a weighted average which is the country´s so-called TWI.

For Barclays, the central bank´s announcement was a "significant event," sending a strong signal to investors to shift their focus to its basket measure of the currency from the USDCNY rate.

What that meant is that if Beijing pursued a 'flat' nominal exchange rate then that would imply a depreciation versus the US greenback towards 6.65 by mid-2016 and 6.80 by the end of 2016, which was not far from the broker´s own forecasts.

Economists at Rabobank were more cautious, stressing the PBoC´s "open recognition" that “even though CNY has depreciated against USD since the beginning of this year, it has appreciated modestly against a basket of currencies."

"What the launch of the TWI should make abundantly clear is that “CNY stability” must now be read as meaning ‘stable in TWI terms’, which is obviously not where CNY TWI sits at present," Rabobank concluded.

Economists at the Dutch bank were forecasting a weakening dollar/yuan to around 7.0 in the short-to-medium term and a fall therefater to as far as 7.75 by the end of 2016.

Rabobank also pointed out how the Russian rouble and the euro had been the two currencies chiefly responsible for the "surge" in the trade-weighted yuan since the start of 2014.

However, over at Deutsche Bank economists believed the PBoC´s announcement was in fact a signal that China "does not intend to engage in competitive devaluation. That is, the RMB is actually likely to appreciate against the other EM currencies if the US Dollar strengthens globally."