Yuan faces reality check on China reopening rally

Bloomberg

The yuan rally spurred by China’s reopening optimism is set to face a reality check as doubts grow on whether any economic rebound will match the currency’s rapid gains.
The yuan wiped out nearly a third of its yearly loss last month before surging past the key 7 per dollar level. Its appreciation beyond 6.95 would suggest the advance is likely overdone, according to Societe Generale AG, while UBS Group AG strategists expect the yuan to end the year at 7 per dollar and weaken in early 2023 with large fluctuations.
Analysts are concerned that the euphoria will fade as growth data are likely to be weak, and virus infections may rise and disrupt the economy when Covid curbs are dismantled. Uncertainty on whether the dollar would remain weak into next week’s Federal Reserve meeting is also inducing caution.
“Reopening is a key precondition for China returning to its potential growth path, but we still would like to point out that the real picture may not be as rosy as it seems,” Ting Lu, chief China economist at Nomura International wrote in a note. He sees export growth becoming a drag in 2023 on top of likely economic disruption due to surging cases, both of which may portend a slower-than-expected growth rebound.
Skittishness in the currency market became apparent when the offshore yuan pared gains of as much as 0.3% after data showed China’s trade weakened. The currency remained under pressure even after authorities eased a range of Covid restrictions, including allowing some people to quarantine at home rather than in centralised camps and scrapping virus tests to enter most public venues. It fell on Thursday to trade around 6.98 per dollar.
“The recent rally in the yuan is nearly fully attributable to the outlook of reopening based on a series of easing restrictions from individual local governments,” said Kiyong Seong, Lead Asia Macro Strategist at Societe Generale in Hong Kong. “The upcoming weak data which might have a lag is unlikely to be compatible with the current rally.” Option market indicators are signaling mixed sentiment toward the yuan and expectations of future swings remain high as per the currency’s one-month volatility gauge.