Outlook for the USD and the yuan from PIMCO in the Year of the Monkey!

Its not only an outlook, but a decent summary of where we are.

Beijing is trying to transition from an infrastructure- and export-led model to one focused on domestic consumption and services

  • Sluggish growth among its major trading partners complicates its task
  • Last October, policymakers unveiled a lower GDP growth rate target of 6.5% as part of their five-year plan beginning in 2016, although we expect growth between 5.5% and 6.5% this year
  • Expect the People's Bank of China (PBOC) will cut rates a further 50 basis points (bps) and reduce its reserve requirement ratio by at least 150 bps
  • Last August's devaluation of the yuan caused global risk premia to rise markedly

The IMF's decision in November to include the yuan in the ... Special Drawing Rights (SDR) is a game changer

  • The yuan's usage is rising quickly in international payments, trade finance, foreign exchange markets and in central bank foreign exchange reserve management
  • Remains to be seen how far and how fast China achieves full capital account liberalization
  • Longer term, though, we see SDR inclusion as the key that unlocks the door to China's capital markets ... - For China, the yuan's inclusion in the SDR is likely to be seen as a beacon for further reform, potentially driving more market-related structural reforms - especially in the financial sector
  • The long-term "reward" for China will be seen most clearly in flows into the currency from the world's central banks and sovereign wealth funds - which should alleviate some concerns over potential capital outflows

Note the prevalence of 'long term' in those points re the yuan and SDR. Depending on your timeframe (I know there are long term traders out there who'll take note of this, but short-er-term traders will disregard .... the great thing is they're both right! Different time frames for different folks).

OK, back to PIMCO

In the near term, we believe the PBOC is trying to shift the rhetoric away from the dollar-yuan exchange rate to bypass any significant U.S. dollar appreciation arising from additional rate hikes by the Fed

  • Equally, the PBOC is keen to avoid appreciation of the yuan versus currencies of its other trading partners

Our investment positioning in Asia continues to reflect our expectation for further policy support across the Asia-Pacific region

  • In foreign exchange, we believe the bullish trend of the U.S. dollar will remain intact and that the changes made to the Chinese currency regime portend additional scope for the yuan to weaken over the next six to 12 months
  • In fact, the further out we look the more we expect policymakers to allow the yuan to move to balance capital flows
  • Thus, we are positioned for a stronger U.S. dollar against the yuan and a basket of other Asian emerging market currencies
  • China's slower growth trajectory is better understood and largely priced in to macro forecasts.
  • It may be too early to tell whether the macro "spillover" is fully understood - especially given the more volatile currency moves we have seen so far this year

Boldings above are mine

-

Comments from Luke Spajic, an executive vice president at PIMCO in Singapore & head of emerging markets portfolio management in Asia