Yuan heading for best monthly gain since 1994

Currency broke thought the psychological 6.3 level against the dollar for the first time on Wednesday with onshore yuan rising 0.52 per cent to 6.2911 to the dollar

PUBLISHED : Wednesday, 31 January, 2018, 7:52pm
UPDATED : Wednesday, 31 January, 2018, 7:52pm

The yuan broke thought the psychological 6.3 level against the dollar for the first time on Wednesday, and is heading for its best monthly gain since 1994, as its appreciation persisted, fuelling expectations it will revisit pre-August 2015 devaluation levels.

Onshore yuan rose 0.52 per cent to 6.2911 per dollar, recovering most of its losses since being devalued on August 11, 2015, when the People’s Bank of China depreciated the currency by nearly 5 per cent in three days, in an effort to end to the one-way appreciation of the mainland currency.

It is now on course to clock a gain of 3.328 per cent for January, marking the biggest monthly gain since 1994, when China completed a major overhaul to its currency regime by unifying its dual exchange rates into a single one.

On the offshore markets, the yuan is under buying pressure, against the dollar particularly, led by banks and leveraged accounts in Asia, as financial conditions get easier in the US while China continues to drum up a hawkish stance verbally on an excessively indebted financial system.

“China is one of the countries in the region showing a bias towards monetary policy tightening. So when the dollar slumps, the yuan finds it much easier to appreciate,” said Jimmy Zhu, chief strategist at Fullerton Markets.

The trade-weighted CFETS RMB index, which measures the yuan against a basket of currencies of China’s major trading partners, rose to a 19-month high of 95.70, showing the currency’s strengthening has become more broad-based.

A string of brokers have raised their forecast for the yuan already this year, because of the weakening dollar and China’s improving economic fundamentals and investment returns.

HSBC raised its forecast to 6.20 against the greenback by the end of this year, from 6.60, as data from the foreign exchange regulator showed Chinese companies have yet to cut their large US dollar holdings, the bank’s head of global emerging markets currency research Paul Mackel wrote in a research note.

Policymakers may tolerate a greater degree of yuan strength, given the risk of US-China frictions, Mackel added.

A degree of overshooting from fair value is probably necessary, he added, to provide reformists in Chinese policy circles a window of opportunity to lobby for more capital account liberalisation.

Nordic bank Skandinaviska Enskilda Banken (SEB) lifted its year-end target in the yuan exchange rate to 6.10 per dollar from 6.30 while China International Capital Corp revised its yuan prediction to 6.18 from 6.28.

It said there was still more room for further yuan strength against the dollar, as long as the Chinese currency kept within its trade-weighted basket range, and the CFETS RMB index was still between 92 and 96.