Rebound in external trade lifts hopes for yuan gains

PUBLISHED : Saturday, 14 June, 2014, 4:19am
UPDATED : Saturday, 14 June, 2014, 6:09am

The yuan posted its biggest weekly rally since December 2011 this week on speculation that the central bank will tolerate gains after its trade surplus widened.

The People's Bank of China raised its daily fixing this week by the most this year after the government reported the largest monthly trade surplus in five years last Sunday.

Investors are becoming more bullish on the yuan as the central bank guides the reference rate higher after five months of setting it weaker, a sign that it may be seeking to deter one-way bets on appreciation.

"The PBOC fixing pattern is a signal that the engineered currency depreciation could be over soon as external trade rebounds," said Tommy Ong, an executive director of treasury and markets at DBS Bank Hong Kong. "It probably also suggests the central bank has achieved its purpose in introducing more two-way moves in altering market expectations."

The yuan rose 0.63 per cent this week to close at 6.2107 per US dollar in Shanghai, the steepest advance since December 2011, China Foreign Exchange Trade System prices show. It climbed as much as 0.27 per cent yesterday to a two-month high of 6.2018. The yuan has dropped 2.5 per cent this year.

The PBOC strengthened the fixing by 0.2 per cent from June 6 and set it at 6.1503 per dollar yesterday. The yuan traded 1 per cent weaker than the reference rate, the smallest discount since April.

"Our view is that better economic data and international diplomacy are at play here," Bank of America Merrill Lynch strategists wrote in a research note yesterday, with a view to a strategic and economic dialogue between the United States and China to be held in Beijing next month.