FX Forecast Update - Danske Analyse - Danske Bank

USD/CNY – trading band to be widened• Growth. The main uncertainty in China is the pace of thedeceleration in China’s long term growth potential.Cyclically the recovery in China remains fragile and recentdata suggest that growth has started to ease again, albeitso far not dramatically. The Chinese economy is nowmoving sideways, with GDP growth around 8%.• Monetary policy. Inflation remains subdued below 2.5% y/yand although we expect it to stay below 3% y/y and henceremain substantially below the government’s 3.5% inflationtarget for 2013. Policy focus is now on longer termstructural economic reforms and the current weakness isnot severe enough to force additional stimulus in China.• FX policy. Intervention in the FX market and the pace ofappreciation has increased in recent months. Thisunderscores that intervention should not be regarded as areluctance to let the CNY appreciate but rather an attemptto control the pace. China is gradually moving towards afloating exchange rate and a convertible currency and thedaily trading band is soon expected to widen from +/-1% to+/-2%. We expect increasing two-way volatility in the CNYexchange rate.• Valuation. Fundamentally CNY is, in our view, now onlyslightly undervalued (about 7%).• Risks: Both slower growth and a weaker JPY couldpotentially slow the pace of appreciation.6.66.56.46.36.26.1Forecast: 6.12 (3M), 6.04 (6M) and 5.98 (12M)AprJul Oct Jan11Source: Danske Bank MarketsUSD/CNY exchange rateTrading bandwidenedPBoC reference rateDaily trading bandSpotApr Jul Oct Jan12Apr13Conclusion. China appears to have stepped up the paceof appreciation as it moves gradually towards a floatingexchange rate and convertible currency. We expect thedaily trading band to widen soon, from +/-1% to +/- 2%.6.66.56.46.36.26.1Flemming Jegbjærg Nielsen, Senior Analyst, flemm@danskebank.com, +45 45 12 85 35www.danskebank.com/CI27