Date
10 December 2016
Beijing may not want the yuan to weaken too much and risk being called a currency manipulator by Donald Trump. Photo: CNSA
Beijing may not want the yuan to weaken too much and risk being called a currency manipulator by Donald Trump. Photo: CNSA

Outlook on US interest rates and yuan in 2017

Will Italy’s referendum on Sunday turn out to be a big surprise?

That perhaps is drawing most of the market attention at the moment, but long-term trends are what investors should focus on.

I’ve been invited to a seminar organized by the HK Society of Financial Analysts to make a number of forecasts for 2017.

Here are some of the main topics discussed:

Most of the participants in the seminar expect the Fed fund rate go up by 1 percentage point, or a hike of 25 basis points this month and another 0.75 percentage point increase in the first three quarters of next year.

However, Esmond Lee of the Financial Services Development Council argued that the Fed would not raise rate this month because higher interest rates would partly offset President-elect Donald Trump’s planned fiscal stimulus measures.

I agree with his view. If interest rate goes up and the US dollar strengthens at the same time, it will have too much negative impact on US companies.

Therefore, I believe the Fed fund rate can only rise to 0.75 percent from 0.25 percent currently.

The Chinese yuan is another widely discussed topic.

My forecast is that the yuan would weaken further to 7 against the US dollar within the next one to two months, and then stage a rebound.

The Chinese currency has already lost around 10 percent, and sharp devaluation will eventually help China’s economy and provide support to the currency.

Another thing is China needs to contain the downside of yuan if it wants to avoid being named by Trump as a currency manipulator.

The launch of Shenzhen-Hong Kong Stock Connect would increase the chances of A shares’ inclusion into the MSCI.

Foreign investors might take the opportunity to buy A shares, and that would also lend some support to the yuan.

This article appeared in the Hong Kong Economic Journal on Dec. 2.

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

Founder and Managing Director of Pegasus Fund Managers Ltd.

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