Yuan rises to 3-year high as PBOC signals comfort with rally

Bloomberg

China’s yuan advanced to a three-year high in onshore markets as the central bank signaled that it’s comfortable with a recent rally by setting a strong daily reference rate.
The currency gained as much as 0.3% to 6.3913 per dollar in onshore markets, the highest since June 2018, while rising 0.4% offshore. The People’s Bank of China set its fixing at 6.4099 per dollar, in line with average estimate in a Bloomberg survey of traders and analysts.
The reference rate helped dispel concerns that the PBOC will seek to slow a yuan rally that has made the currency the best performer in Asia this year. Traders are closely watching the central bank after recent mixed messages from officials over whether the currency should keep appreciating to contain rising imported commodity costs.
“The yuan may climb toward 6.3 per dollar by year-end, but it’s unlikely to surpass that level easily,” according to Xia Le, chief Asia economist at BBVA Hong Kong. “The PBOC may step in to slow the gains before the level is reached, as a rally that’s too quick could hurt exports.”
State media also chimed in with comments supporting the yuan. The China Securities Journal quoted analysts on Wednesday as saying that the currency could rise further due to the nation’s economic recovery and capital inflows. The Shanghai Securities News reported the yuan could rally to as high as 6.2, citing Citic Securities Co, the country’s biggest brokerage.
The currency has advanced more than 2% this year in onshore markets. It breached 6.4 against the dollar in offshore markets, reaching its strongest level since June 2018.
The yuan’s rally since April has been fuelled by weakness in the dollar, as Federal Reserve officials pushed back against tapering expectations. There’s also growing demand for the yuan as foreign investors piled into Chinese bonds for their yields and inclusion in global indexes. China’s economic rebound from the pandemic has also helped boost sentiment.
The one-month risk reversal of the offshore yuan dipped below zero for the first time in more than two years this week, suggesting investors expect further
appreciation.
Dollar-yuan’s forward points slid to a three-month low, also reflecting confidence in the Chinese currency.
“Fundamentally, there’s still an argument for yuan appreciation, especially as the dollar is weaker,” said Eddie Cheung, senior emerging markets strategist at Credit Agricole CIB. “The key for the authorities is ensuring that markets do not become too one-sided. As long as that remains the case, then the yuan can still appreciate.”
Traders were concerned with the PBOC’s stance before Wednesday’s fixing because Beijing had taken various steps to limit the currency’s appreciation. State-owned banks were seen bidding for the dollars on Tuesday as the yuan breached the 6.4 level in offshore markets. This month, the authorities had set the fixing at weaker-than-expected levels in all except four sessions.
The market continues to remain on guard as the PBOC could use tools such as its daily currency fixing as well as verbal warnings to prevent volatility in the yuan. That’s because the potential for higher rates in the U.S. and falling virus cases in other countries could cause sudden changes in capital flows.
“The yuan won’t strengthen too far from the level of 6.4,” said Ken Peng, head of Asia investment strategy at Citigroup Inc.’s private-banking arm. “That’s because the depreciation in the dollar will slow in the coming months, as the U.S. will still lead the world in tightening its policy.”
The onshore yuan gained 0.3% to 6.3940 as of 4:09 p.m. in Shanghai, while the offshore currency rose 0.4% to 6.3854.