By FXEmpire.com
USD/CNY Monthly Fundamental Forecast April 2012
Outlook and Recommendation
FxEmpire is glad to announce the addition of the USD/CNY to our range of currency. We will begin providing daily, weekly and monthly forecast and analsyis.
At the beginning of April the Chinese yuan appreciated, pushing the currency to a new record high (or for USDCNY a new low). Forwards continue to price in no further appreciation this year, which we think is too timid in an environment of a soft economic landing and international pressure. However, there is an increasingly strong case for USDCNY having moved materially closer to fair value, particularly as the current account balance has shifted materially lower. We hold a year-end forecast of 6.10.
The Chinese economy will expand at a strong 8.6% y/y rate during 2012, after last year’s 9.2% gain. Growth will likely accelerate to 8.9% in 2013. Ample room for policy maneuvering remains, with supportive fiscal actions –income tax cuts and extensions to infrastructure and social housing development– to be accompanied by a switch to monetary easing. International trade transactions slowed through the turn of the year. In a context of elevated commodity costs, and with local demand gains outpacing global growth, China’s current account surplus, estimated to close the year at 2.7% of GDP (down from 5.2% three years ago), will continue to narrow over the medium term. The renminbi (CNY) will appreciate at a moderate pace over the next two years. The CNY gained 4.7% against the US dollar in 2011, and is expected to strengthen at a 3.7% yearly rate over 2012-13, as gradual appreciation remains a primary component of a concerted policy to promote domestic market development. Inflation has stabilized, but will display an upward trend throughout the year. Despite having lowered the bank required reserve ratio on two occasions over the past six months, the People’s Bank of China (PBoC) has yet to witch to a definitive growth-promoting stance. The official public sector balance will continue to improve as revenue growth outpaces spending. Tight credit and property restrictions are resulting in healthy house price corrections.
People’s Bank of China increased interest rates for the third time this year on July 6, making clear that taming inflation is a top priority even when as the economy slows.
Benchmark one-year lending rates will be raised 25 basis points to 6.56 percent, and benchmark one-year deposit rates will be raised 25 basis points to 3.5 percent.
Abundant liquidity and elevated commodity prices drove China’s inflation to a 34-month high of 5.5 percent in May, unsettling Beijing which worries rising prices may stir social unrest.
Originally posted here
