China’s yuan rebounds, pacing gains in the pound and euro

The Chinese yuan continue to bounce back against the US dollar on Tuesday, pacing gains in the pound and euro while the yen extended its slide.

The onshore yuan in Shanghai traded at 6.6867 per US dollar at 10.45 am, edging higher by 0.07 per cent from Monday’s close. The offshore yuan in Hong Kong rose by 0.07 per cent to 6.7000 at 10.45 am. On the onshore and offshore markets Monday, the yuan initially traded higher but gave back the gains and more, ending the session lower. Last Wednesday, the onshore yuan touched a six year low as the sterling pound fell to its weakest level against the dollar in 31 years.

The People’s Bank of China on Tuesday set the yuan reference point against the US dollar at 6.8950, weaker by 0.16 per cent or 107 basis points from Monday. Traders are allowed to trade up to 2 per cent either side of the reference point for the day.

Tommy Ong, managing director of treasury and markets at DBS Hong Kong, said the yuan link to a basket of currency so it bounce back with the sterling pound and euro.

“The market has oversold the pound and the euro after Brexit as market players worried about market turmoil. The Monday announcement for Theresa May to become the next British prime minister on Wednesday has helped the pound and euro. This will also help the yuan to stop falling,” Ong said.

Ong belives the yuan, which has fallen against a basket of currencies by 5 per cent this year, would stabilise at its current level between 6.65 to 6.70 level against per US dollar and may bounced back more in the fourth quarter. In October, the International Monetary Fund is slated to add the yuan to its list of reserve currencies, or Special Drawing Rights (SDR), joining the US dollar, euro, yen and sterling pound.

“After joining the SDR, many central banks in the developing markets will need to buy yuan assets to meet their reserves. This will support the exchange rate of the yuan in the fourth quarter,” Ong said.

Sterling has rebounded for three days in a row and most recently was up 0.68 per cent on Tuesday morning to US$1.3081l. Ong said the Bank of England is expected to announce monetary policies on Thursday to support the economy which also benefit the pound. “However, the pound is unlikely to bounce back too much as Brexit would discourage direct investment in the country. The pound could only bounce back up to about the US$1.35 level,” he said.

The euro also rose 0.2 per cent on Tuesday to trade at US$1.1078.

The Japanese yen continue to fall against the US dollar, shedding 0.19 per cent on Tuesday morning. The dollar was buying 103 yen, extending its 2.25 per cent slide on Monday.

Ong said the yen has become a safe haven currency after Brexit, but now traders are shifting back to other currencies as things stabilise.

“It is also related to the market expectation the Japanese government will soon announce new policies to boost the economy and drive down the yen to benefit exporters,” he said.

Even after the fall in the past two trading days, the yen has risen 14.52 per cent against the US dollar this year.

The Hong Kong dollar traded at 7.7581 per US dollar at 10.45am on Tuesday morning, which is now on the strong end of the currency peg, and just shy of year’s high at 7.7503 on January 4.