Yuan expected to weaken in 2015 as dollar rises

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Yuan expected to weaken in 2015 as dollar rises

Traders are betting that the yuan will fall the most in six years in 2015 as China’s economic growth slows and the dollar surges amid expectations for higher U.S. interest rates.

Twelve-month non-deliverable yuan forwards dropped 0.5 percent, the most since March 10, to 6.3482 per dollar on Thursday in New York, according to data by Bloomberg. The forward contracts, which traders use to speculate on or hedge against moves in the yuan, are 3.6 percent weaker than the official exchange rate, the biggest discount since December 2008.

A preliminary Purchasing Managers’ Index by HSBC Holdings and Markit Economics showed this week that manufacturing in the world’s second-largest economy contracted in December for the first time since May, adding to signs that China is losing momentum.

Federal Reserve Chair Janet Yellen said on Wednesday in Washington that the central bank is on course to raise borrowing costs, though not right away.

The yuan is “unlikely to offer a sanctuary with growth slowdown deepening,” Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia, said in a note on Friday.

In the spot market, the yuan fell 0.3 percent to 6.2163 per dollar on Thursday, the weakest since June, extending its decline this year to 2.6 percent, China Foreign Exchange Trade System prices show. That would be the biggest annual drop since 1994.

Policymakers have resisted pressure to weaken the currency in recent weeks, setting the official quote, known as fixing, at 6.1195 per dollar, or about 1.6 percent stronger than the market rate.

The currency is allowed to fluctuate 2 percent up or down from the daily fixing.

Stronger fixings suggest that “the authorities are not willing to sponsor higher levels in dollar-yuan,” Jonathan Cavenagh, a currency strategist at Westpac Banking in Singapore, wrote in a note.

“This is likely to reflect China’s strong structural current account surplus position, a desire to avoid strong capital outflow pressures and to maintain positive momentum around the internationalization of the Chinese currency.”

China posted a record trade surplus of $54.47 billion in November, as imports fell.

Currency analysts are more bullish than traders. The median forecast of 55 strategists surveyed by Bloomberg is for the yuan to rise 2.2 percent to 6.07 per dollar by the end of 2015.

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