Yuan Appreciation Should Aid LatAm

News that China may loosen the currency peg to allow controlled appreciation could be positive for LatAm short-term, though the lasting impact is unclear, say strategists. Morgan Stanley believes the impact on LatAm will be modest, although positive, and adds that there is still uncertainty over how far the Chinese will permit its currency to strengthen in coming months. The shop expects CNY/USD to be at 6.60 by year-end 2010, and 6.20 by the end of 2011, which would represent a gain of just under 10% over the next 18 months. In 2005, China allowed the CNY to gain about 20% over a 3-year period, Morgan Stanley says. Michael Woolfolk, senior currency strategist at the BNY Mellon, is somewhat skeptical about China’s move. He explains that China’s announcement comes shortly before the start of G20 talks and says the announcement may have been made to deflect criticism during the talks. He does believe that a stronger CNY would be beneficial for LatAm exporters, who would be able to better compete with Chinese exporters. However, he does not believe such appreciation will happen long-term. He forecasts the CNY/USD will be at 6.65 by the end of 2010 and 6.35 by the end of 2011. It closed at 6.80 June 24.