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Yuan

Yuan surges to 25-month high as global use rises amid dollar sell-off

Onshore yuan rises 0.67 per cent to 6.4259 against the dollar, marking its strongest level since December 2015

PUBLISHED : Monday, 15 January, 2018, 3:53pm
UPDATED : Tuesday, 16 January, 2018, 1:44pm

The yuan surged to its highest level in 25 months due to a sell-off in the US dollar, and after Germany’s central bank said it had decided to include China’s currency in its foreign exchange reserves, reflecting its increased use by its biggest trading partners.

Traders were selling US dollars as the euro continued to rally after last week’s hawkish minutes by the European Central Bank. Companies attempting to hedge against yuan depreciation risk by buying US dollars and selling yuan in the forward market were suffering seriously, analysts said.

Bundesbank board member Andreas Dombret said in Hong Kong on Monday the German central bank had decided to include yuan into its currency reserves.

The decision comes after the ECB in June switched 500 million (US$609.9 million) worth of its US dollar reserves into yuan, and after the central banks of Russia and South Korea had also expressed interest in doing so.

Onshore yuan rose 0.67 per cent to 6.4259 against the dollar, marking its strongest level since December 2015. The offshore yuan also gained 0.45 per cent to 6.4319 per dollar, again, the strongest since December 2015.

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On Monday, the People’s Bank of China (PBOC) lifted the daily yuan reference rate by 0.55 per cent to 6.4570 per dollar, in its biggest daily move since October.

The currency’s reference rate is used as a mid-point, allowing trades of up to 2 per cent on either side of the so-called fix for the day.

The PBOC’s recent decision to remove the counter cyclical factor from the formula to calculate the daily yuan fixing allowed higher two-way volatility in the exchange rate and amplified the strong euro impact on the yuan, said Ken Cheung, senior Asian FX strategist at Mizuho Bank.

“Under this circumstance, the yuan should maintain its upside momentum if the euro refuses to retreat,” Cheung said.

Moreover, the steady RMB index, which measures the yuan against a basket of currency pairs and currently sits at 94.75, suggests the current yuan strength against the weak US dollar should be tolerable to Chinese policymakers, Cheung added.

Under this circumstance, the yuan should maintain its upside momentum if the euro refuses to retreat
Ken Cheung, senior Asian FX strategist at Mizuho Bank

Still, the yuan’s 1.1 per cent gain so far this month against the US dollar is in line with increases seen in other Asian currencies.

Malaysia’s ringgit has risen 2.3 per cent in the year to date, the best performer among 11-most traded Asian currencies, according to Bloomberg data, followed by Thailand’s baht, which is up 2.1 per cent.

Brown Brothers Harriman said in a research note that markets remain comfortable with China’s macro economic outlook, and should not be concerned about the recent tweak to the yuan fix mechanism.

China is due to announce a string of key economic pieces of data, including fourth quarter and full year gross domestic product, on Thursday.

“The argument for the stronger yuan remains solid as regulators do not want currency weakness to divert attention from economic growth, investment inflow and regulatory reform” said Stephen Innes, APAC head of trading at Oanda.

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