China’s RMB Will Return To Appreciation In Q3

China’s currency will reverse its recent depreciation trend and begin to increase in value during the second half of this year, forecasts Bank of America Merrill Lynch in a research note.

The RMB will end 2014 at an exchange rate of RMB6.10 per U.S. dollar, the bank estimates.

The RMB has fallen more than 2.5% against the U.S. dollar since mid-February. The sustained Chinese currency weakness is raising investor concerns that there is more pain ahead for investors who have bet on the RMB’s appreciation.

Bank of America Merrill Lynch says that bets on the rise of the RMB, including hot money inflows into China and onshore U.S. dollar forward selling, declined significantly because of the RMB’s recent depreciation.

But the bank says the unwinding of those bets is not yet completed, and China’s policy makers may continue to squeeze these speculative investors in May.

Around the beginning of the third quarter, the bank believes the RMB will start appreciate again.

People’s Bank of China (PBoC) showed a 3.3% quarter-on-quarter increase in its foreign exchange reserves in the first quarter this year. It is in line with the recent historical norm, and does not suggest overt aggressive intervention on the part of the Chinese central bank.

Bank of America Merrill Lynch predicts that PBoC has to reinstate sterilization by the second half, which will limit its ability to weaken the RMB further.

Caishen.Co - Primary Data for China Secondary Investment and Stock Markets
Caishen.Co - Primary Data for China Secondary Investment and Stock Markets