Comments on the Chinese yuan from Bank of America Merrill Lynch head of global rates and currencies research

(David Woo)

  • "On the eve of the December FOMC meeting ... The question is, given the semi USD/RMB peg and China's increasing open capital account (which come at the expense of China's monetary independence), whether China can live with higher U.S. interest rates and a higher U.S. dollar. We are skeptical.
  • This is why we think the USD/RMB peg, a marriage of convenience that has been the anchor for the global growth model for the better part of the last 15 years, is headed for a divorce, and we think the RMB devaluation on Aug. 11 was a first small step in this direction."
  • says further yuan depreciation will allow the PBOC to enact easier monetary policy in the face of an economy whose growth is moderating
  • "We believe the RMB will weaken further because, given the increased openness of China's capital account, Beijing will not be able to lower interest rates and defend the RMB at the same time"

Woo is forecasting the USD/CNY to 7.0

More at Bloomberg

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I can't disagree with his reasoning.

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ps. I suspect China will want to keep the depreciation slower and steadier than last time ... the rapid depreciation in August that sent markets on a wild ride may well have been welcomed by some traders with knowledge of what was going on, but if they try it again there may be accusations of 'manipulation' leveled.