China's yuan will sink to a 2-year low in the months ahead as investors flock to the dollar, Bank of America says

• China's yuan will tumble to a two-year low of 6.8 to the dollar by the end of 2022, Bank of America has said.
• The bank's analysts said China's slowing economy and the Fed's rate-hike plans will weigh on the currency.

China's yuan will tumble to a 2-year low by the end of 2022 as investors flock to the dollar and its economy slows, Bank of America has predicted.

BofA strategist Claudio Piron said the onshore yuan would fall to 6.8 to the dollar by the fourth quarter, and then slip further to 6.9 to the dollar in the first three months of 2023, writing in a note Wednesday. It has not traded as low as 6.8 since October 2020.

The onshore yuan was changing hands at around 6.616 to the dollar on Thursday morning, Bloomberg prices showed, having tumbled around 3.8% over the last two weeks.

Piron predicts the yuan will continue to fall in the coming months, because the US Federal Reserve's plan to hike interest rates sharply this year is drawing investors back to the dollar.

The dollar index has climbed almost 8% so far this year as expectations of Fed rate increases ramped up. Higher interest rates make investments in the US look more attractive, which prompts investors to buy the dollar.

China's economic downturn is also causing problems for the yuan, Piron said. Beijing has implemented a strict zero-COVID policy that is weighing on production and the economy. It is also loosening monetary policy, making the country look less appealing to investors.

"Rising US rates are leading to capital outflows, and is unsynchronized with China's divergent monetary policy and downside growth risks," Piron said. He said that in a worst-case economic scenario, the yuan could tumble to 7.20 to the dollar by year-end.

On top of these difficulties, the sharp rise in commodities prices, driven in part by the war in Ukraine, means China's imports are becoming more expensive relative to its exports, Piron said.

"Ultimately, this will result in a narrower trade surplus and less fundamental support for CNY," the Bank of America analyst wrote.

China's yuan, or renminbi, is closely controlled by the country's central bank. The People's Bank of China sets a point each day for the onshore yuan — that is, the currency traded within the country — and allows it to move 2% in either direction.

The offshore yuan is influenced by the onshore currency, but is free-floating. It traded at around 6.65 to the dollar Thursday, after having tumbled roughly 4.2% over the last two weeks.

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