China’s yuan strengthens, but caution remains over the longer-term outlook

The People’s Bank of China on Wednesday set the yuan reference point 24 basis points higher from Tuesday

PUBLISHED : Wednesday, 11 May, 2016, 12:15pm
UPDATED : Monday, 27 June, 2016, 11:51am

The Chinese yuan rose slightly on Wednesday morning, rebounding from a two-month low on Tuesday.

The yuan traded in Shanghai was up 0.08 per cent or 53 basis points in the morning session to 6.5097 against the US dollar, while yuan traded in Hong Kong inched up 0.02 per cent or 14 pips to 6.5346 per dollar.

The People’s Bank of China on Wednesday set the yuan reference point against the US dollar at 6.5209, 24 basis points stronger than its fixing on Tuesday.

The yuan traded in Shanghai closed at 6.5155 per US dollar on Tuesday, a two-month low on Tuesday, as US currency strengthened against its global peers. Meanwhile, worries about China’s economic outlook remained in the spotlight.

“On-going concerns about recovery and runaway debt continue to weigh on traders’ sentiment,” said Stephen Innes, senior trader at OANDA Asia Pacific. “We’ve seen an increase in the onshore/offshore gap widen greater than 200 pips.”

Concern over soaring debt in the corporate and banking sector have increased, accompanied with the build-up of new bubbles such as speculative trading in commodity futures and an excessive run-up in property prices in Shenzhen, said Heng Koon-how, Singapore based senior investment strategist at Credit Suisse.

“We are also watching the jump in China imports from Hong Kong, a possible sign of fake invoicing to facilitate capital outflows…..and the rising number of defaults in the Chinese corporate bonds,” Heng said. He expects the Shanghai-traded yuan to gradually weaken to 6.80 per US dollar in the coming 12 months.

Offshore traders now anticipate more tepid economic data from the mainland, whereas the US economy is beginning to show signs of increasing momentum once again, Innes said.

“There are clearly two dynamics at play. Onshore traders are playing the fixing gap and subsequent momentum, while offshore bets are starting to increase short bets on CNH,” Innes said.

National Bureau of Statistics data released Tuesday showed China’s producer price index (PPI) in April fell 3.4 per cent year-on-year, slightly better than expectations for a 3.7 per cent drop.

Goldman Sachs New York-based chief currency strategist Robin Brooks said in an interview with Bloomberg Radio that the slide of the US dollar is over, given the greenback still rallied despite last week’s payroll data for April which showed the weakest job growth in seven months.

Goldman Sachs expects the US dollar to rise 15 per cent against major currencies in the coming two years, Bloomberg reported.