Yuan/dollar marriage ending in divorce

On the eve of the December FOMC meeting, we think the question is not whether the U.S. economy can live with higherINTEREST RATES and a higher U.S. dollar. The question is, given the semi USD/RMB peg and China’s increasing open capital account (which come at the expense of China’s monetary independence), whether China can live with higher U.S.INTEREST RATES and a higher U.S. dollar. We are skeptical. This is why we think the USD/RMB peg, a marriage of convenience that has been the anchor for the global growth model for the better part of the last 15 years, is headed for a divorce, and we think the RMB devaluation on Aug. 11 was a first small step in this direction.

We believe the RMB will weaken further because, given the increased openness of China’s capital account, Beijing will not be able to lowerINTEREST RATES and defend the RMB at the same time,” wrote Woo, reiterating his longstanding call.

We forecast USD/CNY to rise to 7.0, which would represent 9 percent depreciation from the current level, compared with 3 percent depreciation implied by the forwards right now

We could see renewed decline of the RMB as early as the first quarter, as the combination of the inclusion of the RMB in the SDR and a December Fed hike (both of which are our central scenario) could turn out to be a perfect storm for the RMB.

Source: http://www.macrobusiness.com.au/2015/11/yuandollar-marriage-ending-in-divorce/

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