China’s yuan and stocks rally to highest in months as US dollar slides after rate pause

Analsyts warn the rally may only be short-term only

PUBLISHED : Friday, 18 March, 2016, 1:21pm
UPDATED : Monday, 27 June, 2016, 11:51am

China and Hong Kong stock markets and currencies rallied on Friday to their highest levels in recent months as the US dollar fell amid lower expectations of interest rate increases in the United states. However, analysts warned the rally may not last long.

The yuan hit a four-month high while the Hong Kong dollar also reached its highest since January, reducing capital outflows and boosting the Shanghai market to a two-month high while the Hong Kong market also rose.

The US dollar weakened across all currencies by 1 per cent to 2 per cent over the past two days after the Federal Reserve chairman Janet Yellen on Wednesday suggested there would only be two quarterly rate increases this year rather than the four predicted last year.

“With interest rate rise risks decreasing, it led to strong selling pressure on the US dollar which boosted other currencies including the yuan and Hong Kong dollar. It also lifted global investment sentiment and hence the Hong Kong and China stock markets,” said Jasper Lo Cho-yan, the chief executive of King International Financial.

“However, the US dollar may have been oversold already and it may well bounce back next week. The US still will raise rates two times this year and the first one may come in June. As such, the rally in the yuan and the mainland stock markets may only be short-term as the mainland economy remains weak,” Lo said.

With the road now paved, we could be in store for a substantial rally in commodities, emergency market currencies and gold
Stephen Innes, Oanda Asia-Pacific

Offshore yuan rose to 6.4434 to the US dollar in early trade on Friday, up 0.17 per cent from Thursday when it rose 0.45 per cent, its biggest single-day jump in a month. This is its strongest since December 3.

At 6pm, it was trading at 6.4729, up 0.14 per cent for the week and the third consecutive week of gain. It has risen 1.64 per cent against the US dollar this year, reversing course from the first week of the year, when it was down 2 per cent.

The benchmark Shanghai Composite Index rose 1.73 per cent to reach a two-month high of 2,955.15 points on Friday and a 5.2 per cent weekly gain. The Shenzhen market was also up, gaining 3.65 per cent. Turnover on both markets surged to above 960 billion yuan, the highest so far this year. Hong Kong’s Hang Seng Index also rose 0.82 per cent to close at 20,671.63 points.

“There are lots of moving parts and despite an air of caution chasing this Asia basket currency rally, we are likely to see continued strength on the back of improving local equity markets,” said Stephen Innes, senior trader at Oanda Asia-Pacific, on the yuan.

Innes said the People’s Bank of China’s yuan fixing on Friday at 0.51 per cent, or 333 basis points higher at 6.4628, shows that the central bank is playing into “the notion that an imminent yuan devaluation is fading into the background”.

Onshore yuan rose to a three-month high at 6.4595 to the US dollar on Friday morning.

The Hong Kong dollar rose to 7.7537 against the greenback, nearing this year’s strongest level of 7.7503. The local currency had dropped to 7.8294 on January 20 as capital outflows from the city spiked after the US increased interest rates in December.

“With the road now paved, we could be in store for a substantial rally in commodities, emergency market currencies and gold,” Innes said.

Additional reporting by Xie Yu