The yuan is projected to weaken 2.5% this year, according to a new poll from Reuters. The U.S. dollar, meanwhile, is expected to rally on renewed expectations of interest rate hikes. The predictions come as China’s central bank set lower mid-points for its currency.
The yuan fell to a near-record low against the dollar last month, reflecting China’s willingness to allow the currency to weaken.
China’s vague currency policy was a topic of concern for investors, and partly to blame for the rout at the start of the year when Beijing purposefully weakened the currency. The move sent investors running the other way, pulling out of emerging markets in fear of other countries making similar moves.
Things have stabilized since the start of the year, and China’s central bank has fixed the currency both higher and lower to prevent speculation.
Currency analysts project that the yuan will trade at 6.60 per dollar by the end of the month. In May, the 12-month projection was at 6.72.
A separate poll from last week showed that pessimistic bets on China’s currency were at the highest level in four months, despite the country’s FX reserves rising in both March and April.
The future does not look bright for the yuan. Stocks in China are already down 20% this year, and concerns linger on the strength of the world’s second-largest economy.
New reports show factory activity in the country remains weak, and demand is still sluggish. Hopes of more rate cuts from the People’s Bank of China had all but diminished amid outflow concerns.
With no shift in the country’s monetary policy in sight, the Federal Reserve’s policies will likely drive the yuan.
Janet Yellen, Fed Chair, said rate hikes may be likely in the coming months if the labor market and economic growth continues to improve.