Yuan gains further ground, spurring analysts’ U-turn on outlook

Both onshore and offshore yuan rose on Wednesday, heading for the longest winning streak in more than a month, on growing expectations that authorities aim to push the currency stronger to negate bearish market sentiment.

The yuan has risen 1.6 per cent in the past month, to rank as the best performer among the 11 most traded Asian currencies.

The rally has triggered several global banks into raising their forecast for the currency in recent weeks, reflecting a reversal in expectations amid wide spread consensus earlier this year of depreciation.

Goldman Sachs raised its forecast to 6.70 yuan per dollar by the end of the year. ING Bank raised its forecast in the 6.65 yuan per dollar by 2017 from 6.72 and 6.45 in 2018.

The recent yuan move could be another episode, the third this year, where the authorities deliberately push the yuan stronger to “send a message” to currency traders, Goldman Sachs wrote in a recent report.

“This kind of ‘message sending’ policy practice by the authorities appeared to happen twice in late May and late June—both times after the market had been more bearish on the yuan than what the authorities’ revealed preference indicated,” Goldman Sachs’ analysts said in a report, noting that this time around currency strength has persisted for longer.

Early Wednesday, the People’s Bank of China slightly eased the daily yuan reference rate by 0.05 per cent to 6.6633 from Tuesday’s 11-month high of 6.6597.

Onshore yuan gained 0.04 per cent to 6.6597 against the dollar, poised for a fifth day of advances, reflecting the longest winning streak since July 18. Offshore yuan is up 0.07 per cent to 6.6637, also on track for its longest winning streak since July 18.

Any sustained break above the 6.6500 level may open the gates towards 6.6250 according to technical charts, said Lukman Otunuga, Research Analyst at FXTM.

ING Bank said that the central bank may want to ensure that the majority of market participants agree on the yuan’s appreciation trend, which could be reflected by changes in trends of market hedging tools.

“Under this assumption, we expect the daily fixing to be stronger in coming months. In this case, yuan may follow the dollar index against a basket of currencies asymmetrically – rising more so when the dollar is weak, and falling less so when the dollar is strong,” ING Bank said.

The dollar index against a basket of currencies was little changed on Wednesday amid uncertainty over US President Donald Trumps’ economic agenda.

Federal Reserve Chair Janet Yellen is slated to speak at Jackson Hole, Wyoming on Friday, where she may provide insight tinto the timing of future interest rate hikes and when the US central bank may begin unwinding its balance sheet.