This morning has seen the currency analyst team at Bank of America Merrill Lynch paint a bullish scenario for Asian currencies.

The exception to the bullish outlook is the Chinese Yen (Renminbi); "the CNY is taking a notable backseat with its 28bp depreciation against the USD as a regional outlier. This comes as evidence that the fundamental underpinning for CNY appreciation has become more mixed," says analyst Claudio Piron at Bank of America Merrill Lynch.


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The trade surplus continues to narrow with the 12-month moving average at $13.2bn and the annual surplus forecast to register $83.3bn this year against $157bn last year.

BofA Merill Lynch expect that the current account surplus will narrow to 0.5% of GDP this year compared with 2.4% last year.

This more tempered view of China’s external balances have impactions for the latest US dollar to Chinese Yen exchange rate forecasts.

A narrowing current account surplus, coupled with a more contained inflation forecast of 4.1% in 2012, underpins a end-1Q USD/CNY forecast for 6.32 and year-end forecast USD/CNY for 6.20.

Piron says:

"Clearly, this will be the subject of debate as China’s leader-in-waiting and Vice President Xi Jin Ping is scheduled to visit US President Barack Obama on February 14.

"We expect this meeting to be more of a dress-rehearsal and diplomatic exchange ahead of Xi’s accession to China’s leadership later this year.

"Instead, the real FX policy focus will be on the G20 Finance Ministers’ meeting in Mexico City on February 25.

"At the same time, China’s State Administration of Foreign Exchange reported its second consecutive monthly sale of net foreign exchange in December amounting to $15.3bn, up from the $800mn net FX selling in November and indicating a source of outflows. In our view, this sign of FX outflow and a declining trade surplus are not unrelated and also coincide with the greater use of RMB in trade settlements."