Salient to Investors:

Currency strategists from Barclays to Deutsche Bank are advising to sell the yuan as China growth slows and inflows slow as China demands lenders curb foreign-currency loans on concern companies may have exaggerated shipments to facilitate carry trades.

Igor Arsenin et al at Barclays said policy makers will widen the yuan’s trading band, damping the one-way bet on yuan gains. The analysts advised buying one-month call options on the dollar against the yuan, predicting the Chinese currency will weaken.

Deutsche Bank said the yuan carry trade will unwind as Treasury yields rise, which could end an important source of cheap credit for China.

Amer Bisat at Traxis Partners said China is in a moderately tightening cycle,, and the strengthening of the fixing is part of that story, and expects the yuan to weaken after the central bank set its fixing at a record high. Bisat said China has used a stronger exchange rate to help curb credit expansion, which climbed by a record in March, and is not far away from where they can take their foot off the brake. (The yuan is allowed to trade a maximum 1 percent either side of the fixing.) 

Jonathan Cavenagh et al at Westpac Banking predict the yuan will drop 1.1 percent to 6.2 in the offshore market as the slowing economy leads to currency depreciation in line with Asian peers.

Stephen Roach at Yale said the yuan’s recent appreciation suggests China feels the economy is stronger than most believe, else it would not be condoning a development that might inhibit export growth.

Eswar Prasad at Cornell said there is room for the yuan to appreciate as the economy recovers in half2 2013 because China fundamentals are better than many other emerging markets. Prasad said as speculative capital retreats, it is a propitious time for policy makers to widen the currency’s trading band, loosening control over the yuan.

The median economist expects Chinese growth to hold at 7.8 percent in 2013, the slowest expansion since 1999, and versus the average 6.4 percent rate across Asia. The median analysts expects the yuan to strengthen to 6.1 per dollar by year-end 2013, and to 6 by year-end 2014.

Andrew Colquhoun at Fitch Ratings said the yuan is closer to fair value in terms of trade balance, and it is a priority for the central bank to make the currency a two-way bet to increase room for further reforms.

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