HSBC with a bullish take on the RMB

From a client note overnight

We believe the RMB can strengthen further this year.

  • China's improved growth outlook and prudent monetary policy will support yield differentials and keep residents' capital outflows under control.
  • In fact, there should be USD selling flows from over-hedged exporters instead.
  • We also expect the structural rise in foreign investors' allocation to Chinese equities and bonds to pick up pace this year.
  • Furthermore, it is possible that China's policymakers may tolerate a lower USD-RMB so as to ward off potential trade frictions with the USD. It is easier for China to reform its currency and liberalise the capital account from a position of strength, rather than weakness. 

We are still of the view that the authorities do not want a return of one-way RMB appreciation expectations and hence, will at some point later relax capital outflow measures to generate two-way volatility in the exchange rate.

  • That is why we see USD-RMB at 6.40 come end-2019.
  • This path is also in line with HSBC's forecasts for EUR-USD (1.25 by end-2018; 1.20 by end-2019).

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