December 1, 2023
Yuan seen extending rally to reach key 7 levels by year end

(Bloomberg) — The yuan could reach the 7-per-dollar level in the next few weeks on support from the dollar’s peak and a potential turnaround in the Chinese economy, analysts said.

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The dollar’s recent decline and signs of a thaw in relations between Beijing and Washington have led to a sharp rise in the Chinese currency in November after several months of weakness. On Tuesday, the People’s Bank of China increased its daily fixing by the most since July, pushing the yuan to a four-month high.

China’s rising rates differential with the US has put pressure on the yuan this year, as the PBOC has cut rates while the Federal Reserve has hiked aggressively. As the US looks to be nearing the end of its surge, Overseas-Chinese Banking Corp and Gro Investment Group are among those expecting the Chinese currency to strengthen at least 7.1% after 0.6.

According to some analysts, this strength could give the PBOC respite to consider more aggressive easing steps, including a policy rate cut.

“To me, it looks like they are preparing ahead of their policy rate cut,” said Keong Siong, chief Asia macro strategist at Societe Generale SA in Hong Kong, referring to the PBOC’s strong fixing. “When the external environment is favorable, they can strengthen the yuan as much as possible.”

The PBOC cut its one-year policy rate twice through 2023 to support growth, but concerns over currency weakness and capital outflows have limited the scope for further easing. Instead, it has focused on liquidity management, using various tools including the daily reference rate to support the yuan.

Read: China holds off on rate cuts as focus remains on credit stability (2)

According to Bloomberg Intelligence strategist Stephen Chiu, the bullish momentum could strengthen the currency even beyond the psychologically important 7 level. He said exporters selling their holdings in dollars could also support seasonal demand for the yuan.

return of dollar

A sharp weakening of the dollar’s strength is beneficial for the yuan as well as other emerging markets.

The Bloomberg Dollar Spot Index rose nearly 7% between the July low and the beginning of October, as traders anticipated the possibility of higher interest rates in the US for a longer period of time. Since then, the gauge has erased nearly half of that advance as slowing inflation has encouraged traders looking for a Fed rate cut next year.

Both the onshore and offshore yuan strengthened above the central bank’s daily reference exchange rate on Tuesday, reaching around 7.13 for the first time since July. Beijing allows the currency to trade 2% above or below the reference rate in the domestic market.

Zhou Hao, chief economist at Guotai Junnan International, revised his forecast for the yuan to a range of 7 to 7.17 per dollar by the end of the year. Hao Hong, chief economist at Groww Investment Group, expects it to exceed 7.1 per dollar “very soon” as US yields stabilize and the gap between China and the US narrows.

Bullish sentiment is taking hold in the offshore market, where traders saw long dollar positions being trimmed as more players began betting on a stronger yuan.

Authorities have kept a tight grip on the reference rate, keeping the October fixing largely unchanged.

“The strategy of buying time to wait for the dollar’s trend was successful once again,” said Christopher Wong, strategist at Overseas-Chinese Banking Corp. He said the currency could strengthen to 7.08 in the coming weeks.

–With assistance from Ran Lee.

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