Alun John, Winni Zhang and Alun Zhou

SHANGHAI/HONG KING (Reuters) – As the Chinese currency continues to fall sharply, major investment houses are reducing their forecasts for its yuan. Many were caught off guard by the drastic declines.

It has suffered from slowing economic growth, COVID-19-related financial disruptions, and strong U.S. Fed tightening. While the Chinese authorities are seemingly willing to see their carefully managed currency fall, they appear not to care.

Spot yuan rates have fallen more than 6 percent against the dollar over the past four weeks. On Monday they were at 6.7992 USD. This is surpassing the 6.71 median forecast for the year in an April poll by nine banks.

Many banks are now seeing the yuan fall to 6.9 and even reaching the 7 mark by the end of 2019, levels that have not been seen since the initial stage of 2020’s pandemic.

In a note to clients, HSBC noted that the currency has become too stretched in the face of China’s economic slowdown and the Fed’s hawkishness.

“Neither new developments are per se. But things have become more intense and warrants our consideration when making forecasts.”

HSBC cut its yuan forecast twice in three weeks. It now anticipates that the yuan trades at 6.75 USD at the close of the quarter. After rebounding to 6.70 Q3, it will be at 6.70. This is compared to 6.60 and 6.62 respectively after its last revision.

According to the median forecast, nine banks polled in April had predicted that the yuan would be 6.63 dollars per dollar by June end. Most respondents anticipated that the yuan will weaken further towards 6.71 at the year’s end.

Many analysts have begun to predict further weakness of the Yuan after its latest decline, nearly twenty months ago. This is a rare event for a currency that has been well managed with a narrow range.

The market’s view that China, the second largest economy in the world, faces serious headwinds due to COVID-19 lockdowns has been reinforced by a series of less-than-expected economic data.

“Covid situations onshore could quickly worsen with increased lockdowns and severe disruptions to supply chains,” Barclays In a note, it is written (LON:).

It was also mentioned that authorities could intervene in order to stabilize the currency or boost the economy.

“The People’s Bank of China’s (PBOC) risk of a further weakness in CNY and a more severe decline in USD than anticipated. Risk sentiment may also increase CNY in cases of large-scale stimulus. USD/CNY might see an immediate retracement towards 6.70.

Barclays has reduced its yuan forecasts from 6.3 to 6.9 at the end of Q2 to take into account a weaker dollar and outflows in foreign portfolios.

Mizuho Bank as well UBS also cut their yuan projections, reflecting bearish sentiment.

Mizuho Bank’s chief Asian FX strategist Ken Cheung lowered his year-end forecast to 6.7, down from 6.6, on Monday.

UBS chief China economist Wang Tao has revised her year end yuan prediction to 6.9 from the 6.6 she had previously.

She said that USD/CNY could break 7 in the year-end due to USD strength, and likely sharp weakness of China’s economy. However, it should fall below 7 at year end.

This is due to the expected decline of COVID-related economic impacts in the second half year. Market confidence and growth momentum will improve.