Chinese yuan set for its best quarter since 2011

PUBLISHED : Friday, 29 September, 2017, 4:27pm
UPDATED : Friday, 29 September, 2017, 4:27pm

China’s yuan is heading for its biggest quarterly advance since 2011 but the noticeable sharp reversal in the currency this week highlights growing expectations in the US Federal Reserve raising US interest rates in December, which in turn is boosting the US dollar. Gold is also set for its biggest monthly loss this year.

According to a research note from ANZ Bank, although some Chinese exporters have unwound their US dollars during this year’s yuan rally, most have accumulated considerable US dollar positions since the one-off yuan devaluation in August 2015, reflecting a bias toward holding the greenback.

Domestic exporters might have accumulated US$210 billion to US$440 billion, which is above the long-term level deemed as necessary, assuming that 55 per cent to 60 per cent of revenues from the export of goods over the past two years should have been converted into yuan, ANZ estimates.

Adding to pressures on the yuan in light of such an attitude among local corporates, the US dollar touched a one-month high on Thursday on optimism over the economy after US President Donald Trump proposed the biggest US tax overhaul in three decades, calling for tax cuts for most Americans. The coming weeks will deliver more information on this plan.

On Friday, offshore yuan dropped 0.2 per cent to 6.6681 per dollar, falling for a sixth straight day and paring its quarterly advance to 1.7 per cent. Still, it is poised to see the biggest advance since the fourth quarter of 2011.

Onshore yuan slipped 0.3 per cent to 6.6776 per dollar on Friday, down for a seventh day, in the longest losing streak since June.

In the same vein, gold is heading for its biggest monthly drop since December as the prospects for Fed tightening, the rally in the US dollar and the record high global equities markets have sapped the appeal of bullion.

Prices were down 2.8 per cent in September, the most since Trump’s election month last November.

Many onshore and offshore market participants are puzzled by why China is allowing the yuan to weaken as fast as it gained.

To Christy Tan, head of markets strategy at National Australia Bank, the “RMB madness” confirms that authorities are allowing more volatility in the bilateral rate between yuan and the US dollar while being committed to managing the yuan according to a basket of foreign currencies.

The yuan is still up about 5 per cent against the US dollar even after this week’s slide, but the trade-weighted RMB CFET index has remained in a tight range between 92.5 and 95.0 so far this year.

That may explain the contradictions existing between the People’s Bank of China’s second quarter Monetary Policy Report that said rapid currency movements and higher volatility are in line with market-driven forex reforms, and the central bank’s long-standing argument for maintaining the currency’s relative stability around an equilibrium level.

But during China golden week National Holidays between October 1 and 8, the yuan is expected to consolidate around current levels barring any huge price action in the dollar, said Frances Cheung, head of Asia Macro Strategy at Westpac Banking Corp, adding that the currency is forecast at 6.64 against the dollar by year end.