Yuan May Rise 7%, Forwards Underestimate Gain, Wells Fargo Says
February 26, 2010, 12:38 AM EST
By Patricia Lui
Feb. 26 (Bloomberg) -- Yuan forwards underestimate the pace of gains in China’s currency, which may strengthen as much as 7 percent in 18 months, according to Wells Fargo & Co.
The central bank may allow the yuan to resume appreciation around the middle of the year and will then seek an annual 6 percent to 8 percent advance against the dollar, Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, wrote in a research note yesterday. Companies should buy the non-deliverable forward to hedge against strengthening in the currency, he said.
Allowing the yuan to resume appreciation may help China keep inflation under control amid record lending growth and surging property prices. The exchange rate has been kept at about 6.83 per dollar since July 2008 as policy makers intervened to help exporters weather the global recession. Overseas sales rose in January and December, ending a 13-month slump.
“Whether the renminbi appreciation begins in April, May or June, we expect currency gains over the next year to outpace the move currently priced into the non-deliverable forward market,” Bennenbroek wrote.
The 12-month NDF rose 0.1 percent to 6.6600 per dollar as of 12:26 p.m. in Shanghai, reflecting bets that traders see the yuan strengthening 2.5 percent from the spot rate of 6.8268. Bennenbroek is predicting an appreciation of 3.5 percent.
China is carrying out stress tests on labor-intensive industries to gauge the impact a stronger yuan would have on earnings, the 21st Century Business Herald reported today, citing unidentified officials.
Managed Appreciation
The renminbi will likely resume gains around mid-year and the debate on timing is “moot,” Bennenbroek’s note read. The authorities will favor a managed appreciation rather than a “one-off” revaluation, he said.
The renminbi is a denomination of the Chinese yuan. Forwards are agreements where assets are bought and sold at current prices for delivery at a specified time and date. Non- deliverable contracts are settled in dollars rather than the local currency.
Credit Agricole CIB in Hong Kong said China may allow the currency to appreciate in the coming weeks to help curb inflation pressures.
“The idea that the yuan may be revalued by more than 2 percent seen in July 2005 seems to be spreading in the investment community,” Sebastien Barbe, head of emerging- markets research, wrote in a research note. ”Such a move would be brave. However, it would be the most efficient way to cap
February 26, 2010, 12:38 AM EST
By Patricia Lui
Feb. 26 (Bloomberg) -- Yuan forwards underestimate the pace of gains in China’s currency, which may strengthen as much as 7 percent in 18 months, according to Wells Fargo & Co.
The central bank may allow the yuan to resume appreciation around the middle of the year and will then seek an annual 6 percent to 8 percent advance against the dollar, Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, wrote in a research note yesterday. Companies should buy the non-deliverable forward to hedge against strengthening in the currency, he said.
Allowing the yuan to resume appreciation may help China keep inflation under control amid record lending growth and surging property prices. The exchange rate has been kept at about 6.83 per dollar since July 2008 as policy makers intervened to help exporters weather the global recession. Overseas sales rose in January and December, ending a 13-month slump.
“Whether the renminbi appreciation begins in April, May or June, we expect currency gains over the next year to outpace the move currently priced into the non-deliverable forward market,” Bennenbroek wrote.
The 12-month NDF rose 0.1 percent to 6.6600 per dollar as of 12:26 p.m. in Shanghai, reflecting bets that traders see the yuan strengthening 2.5 percent from the spot rate of 6.8268. Bennenbroek is predicting an appreciation of 3.5 percent.
China is carrying out stress tests on labor-intensive industries to gauge the impact a stronger yuan would have on earnings, the 21st Century Business Herald reported today, citing unidentified officials.
Managed Appreciation
The renminbi will likely resume gains around mid-year and the debate on timing is “moot,” Bennenbroek’s note read. The authorities will favor a managed appreciation rather than a “one-off” revaluation, he said.
The renminbi is a denomination of the Chinese yuan. Forwards are agreements where assets are bought and sold at current prices for delivery at a specified time and date. Non- deliverable contracts are settled in dollars rather than the local currency.
Credit Agricole CIB in Hong Kong said China may allow the currency to appreciate in the coming weeks to help curb inflation pressures.
“The idea that the yuan may be revalued by more than 2 percent seen in July 2005 seems to be spreading in the investment community,” Sebastien Barbe, head of emerging- markets research, wrote in a research note. ”Such a move would be brave. However, it would be the most efficient way to cap