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The Yuan Sandpile

Pressures on China’s currency to weaken have been building as China’s cyclical outlook has softened. The timing of trade negotiations is the best explanation why the yuan has not depreciated more aggressively so far. Recently released Q1 balance of payments details point to continued outflow pressures despite stronger cyclical momentum during the previous quarter and reasonable portfolio inflows. The yuan should remain range bound as long as Beijing perceives trade negotiations as generating some probability of success, but continued monetary easing and the absence of alternative policy levers to stimulate the economy point to depreciation through the 7.0 level before year-end.

Posted July 10, 2019
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