Offshore spot rate to greenback hits 4-week low as pundits see 'gradual' depreciation of the renminbi

Analysts are expecting a weaker but more flexible renminbi ahead of the International Monetary Fund's (IMF) final decision on whether to include the renminbi in its reserves basket.

The redback has been softening this month, with the renminbi spot rate declining 1.74 percent against the US dollar in the offshore market to 6.43 yuan per US dollar by 6:15 pm on Tuesday - its lowest point in four weeks.

The swing comes ahead of the IMF's decision on whether to add the renminbi to its special drawing rights (SDRs) basket, after the US dollar, euro, Japanese yen and British pound.

In a statement on Nov 13, IMF Managing Director Christine Lagarde suggested the fund's executive board to vote in favor of the inclusion next Monday, given the renminbi is "freely usable" and meets the IMF's other criteria.

"As yearend approaches, expectations of the US Federal Reserve kicking off the rate-hike cycle are rising. The latest economic figures, such as on consumer spending and business investment, have strengthened such a view," said Aidan Yao, senior emerging Asia economist at AXA Investment Managers Asia Ltd. He pointed out that as China's capital outflow concern eases from an estimated $150 billion in August and September to $30 billion last month, the People's Bank of China (PBOC) - the central bank - is expected to reduce intervention in the foreign-exchange market after the IMF's decision.

The PBOC and mainland commercial banks bought a net 12.9 billion yuan ($2 billion) worth of foreign exchange last month - a reversed trend of net sales in the previous three months - which demonstrates the authorities' efforts to counter-balance heavy capital outflow since July.

Joining the SDR would have a long-term positive effect on the renminbi as the move is expected to "encourage central banks to invest in renminbi-denominated assets, which would potentially stabilize renminbi demand, partly offsetting capital outflows at times of higher uncertainty," analysts Atsi Sheth and Marie Diron of Moody's Investors Service said in a report on Nov 23.

For the short term, the market remains bearish on the redback.

Foreign exchange strategists Claudio Piron and Adarsh Sinha of Bank of America Merrill Lynch noted on Nov 16 that their end-2016 target for offshore renminbi stays unchanged at 6.9 yuan per US dollar on "fragile sentiment".

Paul Mackel, head of global emerging markets foreign-exchange research at HSBC, said on Nov 14 that, despite a knee-jerk reaction for the renminbi to strengthen, gradual depreciation of the currency is anticipated with greater two-way volatility.

The bank holds yearend forecasts for the renminbi at 6.5 yuan per US dollar for 2015 and 6.6 yuan per US dollar for 2016.

emmadai@chinadailyhk.com

(HK Edition 11/25/2015 page8)