While a currency report to be released this week by the US Department of the Treasury has unnerved investors, China is unlikely to let the yuan depreciate sharply, and the currency might hover between 6.8 and 7 versus the US dollar, DBS Bank Ltd (星展銀行) said yesterday.
While the US Federal Reserve plans to accelerate its interest rate increases, China might take a neutral and easing monetary policy, and the yuan would suffer more depreciation pressure, Hong Kong-based DBS Bank senior economist Nathan H.L. Chow (周洪禮) told a news conference in Taipei.
Given depreciation pressure on the yuan, China might take three different actions, Chow said.
In the first scenario, which Chow said is the “most possible,” China would keep the yuan stable by slowing down its deleveraging.
Then when the US-China trade spat escalates, China might let the yuan depreciate, but not very quickly, he said.
Even though the level of 7, which is said to be the Chinese government’s “bottom line,” is psychologically important to market observers, it is hard to forecast if the yuan would weaken past that level as the People’s Bank of China would intervene to support the currency any time its sees fit, he said.
In the second scenario, China would ignore the US’ warning and let the yuan depreciate considerably, but this is less possible as the huge depreciation of the yuan would lead to volatility in the neighboring nations’ foreign-exchange and stock markets, Chow said.
In the third scenario, China would agree to open its market and adjust its regulations as US President Donald Trump requires, “but it is the least possible as it is not China’s style,” he said.
While Bank of Taiwan (臺灣銀行) last week said that global gold prices are likely to rally next year due to a downturn on the US stock market, DBS Bank said that gold prices do not stand a chance of rising, as investors would miss out on interest revenue and would buy less gold after the Fed raises interest rates.
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