Contrarian who got yuan right says rally has further to go

The yuan’s climb against the dollar has further to go, even after China’s currency closes out its steepest annual gain since 2008.

That’s according to Peter Rosenstreich, head of market strategy at Swissquote Bank SA, who says strong economic growth, higher local borrowing costs and a weaker greenback will support the currency. The Gland, Switzerland- based lender predicted at the end of last year that the yuan would strengthen to 6.55 per dollar by the end of 2017 – a contrarian bullish call that is looking like it’ll be the most accurate among projections compiled by Bloomberg.

“We continue to be more optimistic on China, and expect broad dollar weakness and demand for alternative currencies, diversifying out of the greenback, to support the yuan,” said Rosenstreich, who expects the exchange rate to end 2018 at 6.45. A stronger exchange rate helps “project the image that holding the currency is a smart idea.”

The Chinese currency has surged this year amid tighter capital controls, climbing bond yields and a slump in the dollar. A year ago, analysts were expecting the currency to weaken to 7 per dollar as early as the first quarter. Their latest consensus projection is for it to remain little changed in 2018.

The yuan’s steady ascent has improved the appeal of the nation’s assets for foreign investors and helped to distance memories of 2015’s shock devaluation, while also signaling that the deleveraging campaign that has sent bonds tumbling hasn’t got out of hand. Still, the risk of a stronger currency for China is that it could crimp exports. The yuan was near the highest level this year against a basket of peers this week.

Next year, the yuan will be supported by a sustained economic recovery, with growth likely to accelerate to 6.8 percent amid an increase in investments and strong external demand, said Rosenstreich. The People’s Bank of China will be ready to boost interest rates if the Federal Reserve turns more hawkish than expected, reducing the risk of capital outflows, he added.

For Sean Yokota, head of Asia strategy at Skandinaviska Enskilda Banken AB, which was ranked by Bloomberg as the top yuan forecaster in the two quarters through September, policy makers will strengthen the exchange rate to attract foreign investors and help increase the chance for onshore bonds to be included in global indexes in 2018. He expects the currency to rise to 6.3 by the end of next year from 6.5560 as of 5:01 p.m. in Shanghai yesterday.

“The U.S. built the image that a strong dollar equaled a strong U.S.,” said Rosenstreich. “China could be following this branding strategy.” Bloomberg