China’s yuan nears 25-month high against the US dollar on optimism over country’s economic outlook
Currency also buoyed by expectations world leaders gathering in Davos will endorse a bigger international role for the yuan
China’s yuan currency traded just below its 25-month high on Wednesday, buoyed by rising expectations that the country’s economy was moving toward higher quality growth and amid speculation that world leaders at the World Economic Forum would voice support for the currency.
The People’s Bank of China set the daily yuan reference rate at 6.3953 against the dollar on Wednesday, the highest level since December 2015. The currency’s reference rate is used as a mid point, allowing trades of up to 2 per cent on either side for the day.
In the onshore spot foreign exchange market, the yuan advanced 0.20 per cent to 6.3920 against the dollar, only a hair’s breadth away from last week’s 6.3899 level that was its strongest in 25 months.
Market expectations were growing over the potential success of President Xi Jinping’s structural reforms that are aimed at achieving more sustainable, higher quality economic growth in China. Data last week showed that nation’s gross domestic product rose 6.9 per cent in 2017, accelerating for the first time in seven years.
The currency’s recent gains could mean that sovereign wealth funds and central banks would increase allocations into yuan, pushing it into new trading ranges of around 6.3 compared to about 6.5 at the start of this year, analysts said.
“China’s intention to ... keep the currency stable, with the objective of enhancing its role as a global reserve currency during the 2018 World Economic Forum, may lead to more yuan gains”, said Christy Tan, head of markets strategy and research for Asia at National Australia Bank.
Separately, state-backed Securities Daily newspaper cited Bank of China (Hong Kong)’s chief economist, E Zhihuan, as saying that yuan was likely appreciate further because of dollar weakness as other central banks could exit from their quantitative easing policies quickly.
On Wednesday, the broad dollar index, measured against a basket of major world currencies, sank below the key 90 mark for the first time since December 2014.
“For some time in the future, the chance of a sharp depreciation in the yuan is unlikely, and funds will be biased toward buying rather than selling,” E said.
Jimmy Zhu, chief strategist at Fullerton Markets, noted however that while the PBOC had set Wednesday’s yuan mid point at its strongest level in over two years, it still came in at a slightly weaker than expected level according to an estimated formula of the central bank’s reference rate.
“Despite the plunge in the US dollar, the slightly weaker yuan fixing may suggest the PBOC is wary of excessively sharp appreciation of its currency that would hurt economic growth,” Zhu said.
China’s State Administration of Foreign Exchange has also said recently that the yuan’s strength reflected partly a weakness in the US dollar, and fluctuations in the yuan would be normal given uncertainties in the global economic recovery and over the monetary policies of major economies.