UBS Group AG abandoned its forecast for the yuan to appreciate this year, anticipating that the trade war will continue to put pressure on the currency, hurt China’s economic growth and spur the country’s policy makers to unleash more liquidity.
“With underlying pressures on CNY set to intensify and China’s current-account surplus likely to decline notably, we see CNY coming under more depreciation pressures” despite the People’s Bank of China’s efforts to stabilize it, Wang Tao, head of China economic research at UBS in Hong Kong, wrote in a note. CNY refers to the yuan-dollar currency ticker.
UBS now sees the yuan dropping to 6.8 for year-end, versus 6.3 previously. The Swiss bank now sees the yuan at 6.9 per dollar at the end of 2019, against 6.2 previously. UBS trimmed its China GDP growth forecast to 6.5 percent for 2018, from 6.6 percent, and to 6.2 percent, from 6.4 percent, for next year. Ten-year Chinese government bond yields are seen by UBS at 3.4 percent at year-end.
The “impact of trade-war escalation is coming,” Wang wrote. She underscored that the retreat in the yuan isn’t seen as a deliberate devaluation. China will pursue domestic policy easing to provide an offset to the hit from trade sparked by tariff hikes triggered by President Donald Trump, in UBS’s view.
Among the steps UBS sees are 1.5 percentage points of reductions in banks’ required-reserve ratios, along with PBOC liquidity offerings to banks via lending facilities and adjustments to the pace of regulatory tightening of the shadow-banking sector.