Saxo Bank: SOFAZ's yuan-denominated investments could have a rough time

Baku. 30 October. REPORT.AZ/ John Hardy, Head of FX Strategy at Saxo Bank answered the questions of Report News Agency. Report presents the interview as below: 

- Will the euro’s current weakness be long lasting?

- I expect that we should continue to see relative EUR weakness for much of the duration of the ECB’s QE program, which will likely be extended at the December meeting to perhaps mid-2017 or even late 2017, judging from the hints from ECB president Draghi at the last meeting.

- What is your outlook for EURUSD till the end of 2015?

- That will be mostly dependent on whether the incoming US data over the next two data cycles supports the prospect for a Fed rate hike at the December 16 FOMC meeting. Assuming we do see the least uptick in inflation data and a bounce in the payrolls growth after a couple of weak months in August and September, then I think it is likely that we see a December move and that the EURUSD rate could finish the year around the 1.0500 area and possibly lower if the US data is particularly strong. The secondary consideration is the size and impact of whatever the ECB will announce at the December 3 ECB meeting, though I think their coming easing programme is mostly priced in and that the USD and FOMC are the more important factor in determining the EURUSD exchange rate for now.

- Which currencies may be considered for safe haven investment?

- If markets take a nosedive again like they did back in August when China devalued its currency, then would expect the market to unwind expectations for Fed rate hikes and therefore support the Euro and the Japanese yen.

- As was announced before, the State Oil Fund of the Republic of Azerbaijan (SOFAZ) expanded its investment portfolio via investments in Chinese Yuan for the purchase and custody of yuan denominated sovereign and agency bonds in July this year. What is your opinion on the prospects for the Yuan?

- I think it is likely that the recent change in the China’s exchange rate regime was the first step toward allowing the yuan to float more freely versus the market, though for now it appears that the PBOC/Chinese regime would like to carefully manage the rate and doesn’t want to allow any significant adjustment at this time. If the PBOC was to step back and allow the market to determine the rate, I suspect the Chinese currency would devalue some 10-15% to align more fully with other Asian currencies. The Chinese currency is too strong, having followed the USD stronger versus other currencies. An in the bigger picture, it is far too strong versus the Japanese yen, as the latter is near the lows

- Is SOFAZ’s investment still looking to have potential for 2016 and the long term beyond considering the economic circumstances in China and its currency?

Considering my outlook for the Chinese currency, I think yuan-denominated investments could have a rough time of it over the next couple of years because of the risk of a minor to major currency devaluation.