Capital outflows and currency weakness have become less mutually reinforcing
• The yuan thus appears to be depreciating in a more orderly fashion and seems less of a risk trigger for sentiment on China
• The currency is also being stabilized in the near term by firmer interventions by the authorities
• But it’s too early to call an end to the yuan’s underlying downtrend
• Both cyclical (diverging monetary cycles) and structural (demand for foreign assets) downward pressures remain intact
• Nor has China’s systematic risk been mitigated, as the authorities’ imbalanced policy response so far compounds financial risks
• We thus warn against over-extrapolating the yuan’s stability for this quarter, as the yuan will continue a stop-and-go depreciation
• We see another 8-10% adjustment (CFETS index 88, USD/CNY 7.20-7.30) justified by fundamentals and likely overshooting
(RBS)
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