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Yuan trades at three-month high after European Central Bank eases currency war fears

People’s Bank of China sets yuan mid-price at strongest level this year

PUBLISHED : Friday, 11 March, 2016, 6:43pm
UPDATED : Friday, 11 March, 2016, 7:08pm

The yuan hit a three-month-high on Friday, wiping out all its losses against the US dollar this year, after mainland China’s central bank set the mid-price higher following European Central Bank moves on Thursday to avert a currency war.

Offshore yuan traded in Hong Kong and overseas markets rose to 6.4827 per US dollar in the morning, up 0.3 per cent from Thursday and the strongest level since December 7, when it traded at 6.4709. The currency remained strong in the afternoon, trading at 6.4927 at 3.30pm.

Onshore yuan also rose to the highest level this year, reaching 6.4850 per US dollar in early trade, the strongest since December 29’s 6,4832, before softening to 6.4941 by 3.30pm.

Tommy Ong, the managing director of treasury and markets at DBS Hong Kong, said the yuan rose after the People’s Bank of China set the mid-price at its strongest level this year at 6.4905, up 222 basis points or 0.34 per cent from Thursday.

Traders are allowed to trade 2 per cent up or down from the mid-price set by the PBOC. Traders consider the central bank fixing of the reference price at a strong level against the greenback as guidance for the currency to trade stronger that day.

The European Central Bank president’s statement suggested it would prevent a currency war
Tommy Ong, DBS Hong Kong

Ong said the PBOC move came after ECB president Mario Draghi ruled out further interest rate cuts on Thursday.

“The European Central Bank president’s statement suggested it would prevent a currency war,” Ong said. “This supported the euro overnight and hence pushed up the yuan. The PBOC has clearly indicated it sets the mid-price against a basket of currencies and the euro is a major component of the basket.”

Ong said he believed the yuan would remain strong and trade around the level of 6.45 to 6.55 in the near term.

“There is however no room for the yuan to go much stronger than the 6.45 level,” he said.

Stephen Innes, senior forex trader at OANDA, said the euro rose by 2 per cent on Thursday, which benefited Asian currencies.

“The momentum carried over to Asia with short Kiwi aggressively unwound. I think this played into the rest of the Asia currencies,” Innes said

The rise in onshore yuan on Friday meant all the losses against the US dollar have been erased. The mainland currency depreciated 1.56 per cent against the greenback in January.

Offshore yuan has had am even bumpier ride this year. It has now risen 1.13 per cent against the US dollar this year after depreciating by 2 per cent in the first week of January when currency speculators tried to attack the currency. Traders said the PBOC had aggressively intervened in the market from time to time during the past two months to keep the currency stable.

The offshore yuan rose 0.1 per cent this week after rising 0.67 per cent last week, while onshore yuan rose 0.2 per cent this week, after rising 0.5 per cent last week.

The PBOC set the yuan mid-price against the euro at 7.2675, weaker by 1,144 basis points, against 100 yen at 5.7450, stronger by 71 basis points, and against the pound at 9.2820, weaker by 309 basis points.

The Hong Kong dollar remained stable, trading at 7.7624 on Friday.

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