UBS sees reduced depreciation pressure on yuan

A weaker US dollar, less negative economic numbers and improved market sentiment in China would reduce depreciation pressure on yuan in the next few months compared with the beginning of the year, a UBS report noted.

After depreciating 1.3 percent in January, the RMB stabilized in February before appreciating 1.6 percent against the U.S. dollar in March. Meanwhile, the RMB offshore forward premium against the U.S. dollar also showed much improved sentiment.

UBS chief China economist Wang Tao identified three factors that have been pivotal in reducing depreciation pressures: the U.S. Fed's more dovish stance and associated weakening of the U.S. dollar, improvement in recent economic indicators, and tightened control on cross-border capital flows.

However, in the longer term, the UBS expects underlying outflow pressures to persist as the U.S. economy improves and inflation picks up, market sentiment on Fed intentions and actions may change again.

The bank maintained its current forecast of yuan exchange rate against U.S. dollar at 6.8 by the end of 2016, but saw increasing risk that the yuan may not depreciate by as much to leave it closer perhaps to around 6.6 to 6.7 by year-end.