A slump in Chinese stocks this year has triggered extreme volatility across global markets. A weaker yuan is seen as one of the policies Beijing is likely to use to make sure an economic slowdown doesn't turn into a damaging hard landing. "While policymakers are still trying to maintain the trade-weighted (yuan) exchange rate in a stable range, we now anticipate that they will transition towards targeting a depreciation in the NEER (nominal effective exchange rate) about two quarters earlier than initially expected," Morgan Stanley said in a note. "This move will help policymakers to still cut interest rates to manage deflationary pressures, but will imply further depreciation of the yuan (against the dollar)."
Morgan Stanley revised its end-2016 dollar/yuan forecast to 6.98 from 6.80, and its end-2017 forecast to 7.31 from 7.07. The US bank now reckons Beijing will start to transition towards a depreciating NEER in the third quarter of this year, or perhaps earlier if there's no let up in capital outflows and market volatility. On Friday Goldman Sachs raised its 12-month forecast to 7.00 from 6.60, and its end-2017 call to 7.30 from 6.80. The yuan has fallen 1.5 percent since the start of 2016 to its lowest against the dollar in over four years, a relatively large fall that has raised alarm among some rivals that China was risking a bout of competitive devaluations.