China's yuan seen falling another 3 pc over next 12 months

BENGALURU: The Chinese yuan may fall more than 3 percent against the dollar by a year from now, more than expected just a month ago, as the economy struggles to maintain momentum and as the dollar edges up on views of an eventual U.S. rate rise, a Reuters poll found.

The survey of over 50 foreign exchange strategists over the past week found the yuan is expected to slip to 6.70 by end-October before falling rapidly to about 6.85 per dollar by this time next year.

It was trading around 6.63 on Wednesday, not far from recent near 6-year lows and down around 2 percent so far this year. That 12-month consensus is the weakest in several years of Reuters polls.

If realised, it would mark the lowest level for China´s closely-managed currency since December 2008 - when the collapse of Lehman Brothers brought on a global recession.

The most pessimistic view was for the yuan to fall to 7.60 in 12 months.

Pressure on the yuan has ebbed recently on views that the U.S. Federal Reserve may not raise rates this year, which has held back the dollar, and as the People´s Bank of China tried to stabilise the currency by fixing higher mid-points. But that will eventually give way to a weaker yuan.

"Recent macroeconomic data from China have on average been stable. In our view, however, the better data is a reflection of policies driving a cyclical reflation rather than a change in the trend of structurally lower growth," said Guillermo Mondino, head of emerging market research at Citi.

"Chinese authorities will attempt to keep the yuan stable, but eventually let it depreciate in line with the economy´s adjustment to slower growth."

Citi predicts the yuan will weaken to 6.84 in a year. A slowdown in exports due to weak global demand and overcapacity in some industries have pulled economic growth to its lowest in 25 years.

Second-quarter growth was slightly stronger than expected due to a government infrastructure spree and housing boom.

But economists warn the economy is growing lopsided and increasingly reliant on government spending as private investment cools. The Reuters poll shows a distinct split in the outlook for the yuan between now and end-October and the nine months after.

The conclusion of U.S. presidential elections in November may free the Federal Reserve´s hand to tighten policy, provided the economy remains relatively strong, in turn boosting the dollar. But it´s not just the yuan.

The dollar is not expected to rally against most global currencies until after the election.

"While downside risks are evident we expect the dollar to be broadly stable as weak growth abroad and central bank easing in response provides support for the dollar.

Once the election has passed and the Fed lifts rates as economic and political uncertainties fade, the dollar is set to perform well," said Sook Mei Leong, analyst at BTMU.

A Reuters poll last month found the Fed will wait until the fourth quarter before raising interest rates, likely in December after the election.

BTMU predicts one more lending rate cut in China this quarter, after 165 basis points (bps) of cuts by its central bank since late 2014 and a 300 bps reduction in banks´ reserve requirements in roughly the same period.