Excessive yuan weakness after SDR inclusion is capped, UBS says

The decision by the International Monetary Fund to include the chinese yuan in the basket of currencies that make up its so-called ‘special drawing rights’ will not lead to immediate compulsory buying of the yuan nor to an immediate and significant depreciation, economists at UBS said.

However, over the longer-term it will bolster Beijing’s efforts to assign capital more efficiently. Indeed, over that same time frame the very low global exposure to the country’s assets could bring more assets into the stockmarket.

The Asian giant’s onshore bond market should be another beneficiary, benefitting from increased global portfolio allocation flows, UBS economist Tao Wang said in a research report sent to clients

Nonetheless, in the very short-term – on a three to six month horizon - SDR inclusion will likely be negative for the domestic equity market.

As well, it will give the People’s Bank of China more freedom to manage the exchange rate, “but immediate and significant depreciation is unlikely,” the Swiss broker added.

“We expect a 5% RMB depreciation against the USD in 2016, likely done at or after bouts of USD strength against other major currencies throughout the year, in a gradual rather than one-off manner. We see USDCNY trading at 6.8% by end 2016 and excessive CNH weakness capped,” Wang concluded.