Yuan Success Week Gets PBOC Attention, Appreciation Bets

(Bloomberg) – The relentless rise of the yuan against the dollar is raising expectations that it could reach levels not seen before its shock devaluation in 2015.

The rally of nearly 1% this week brought it closer to Wall Street’s most bullish calls and reminded the People’s Bank of China that authorities are watching the market closely. Strategists at Citic Securities Co. and Scotiabank expect the currency to strengthen to 6.2 against the dollar in onshore markets, from 6.3840 currently.

With the rebound in the Chinese economy from the pandemic and the accumulation of foreign funds in its stock and bond markets, the yuan has broken through critical levels that have been held over the past three years. This breakthrough is creating its own momentum, attracting investors looking for an attractive yield game in a world of low interest rates. So far, the central bank has refrained from taking action to slow the appreciation of the yuan, although a statement released Thursday evening warned against one-way bets and predictions.

“The central bank is trying to downplay the market’s focus on the renminbi after two separate official PBOC speeches last week garnered a lot of attention,” said Tommy Xie, head of Greater China research. at Oversea-Chinese Banking Corp. in Singapore. Nonetheless, “the dollar’s built-in structural weakness could remain favorable to the renminbi over the medium term,” allowing a rise towards 6.25 by the end of the year, he said.

While the PBOC’s daily dollar-yuan benchmark rate this week implied she was comfortable with the recent appreciation, her latest statement suggested that policymakers are increasingly concerned about the increased focus on the strength of the yuan. Traders will watch Friday’s fixing at 9:15 am Beijing time for other signals.

The forex market is currently in equilibrium and the rate could move in either direction in the future as many market elements and policies could affect it, the central bank said. It cannot be used as a tool to boost exports or offset rising commodity costs, the authorities stressed, adding that “businesses and financial institutions should adjust to a two-way fluctuation in the market. exchange rate”.

“Despite the neutral tone, the timing of the statement makes it clear that the central bank is trying to break the appreciation psyche,” said Chang Shu, chief economist for Asia at Bloomberg Economics.

Correction of signals

The PBOC has been neutral in setting its daily benchmark rate this week, following market movements rather than using it to limit appreciation. In the past, authorities have used fixing to signal that the currency was seen as moving too quickly in one direction.

“With the strength of Chinese exports, the decline in real rates in the United States and the accommodative stance of the Federal Reserve as a whole, we believe that the renminbi still has room to appreciate,” said Ming Ming, head of fixed income research at Citic, China’s largest brokerage. .

Chinese exports jumped more than 32% in April in dollars, beating expectations as global stimulus measures fueled demand. The rest of the economy, from industrial production to retail sales, also posted strong growth.

Best performer

The rally made the yuan the best performing currency in Asia this year. It topped 6.4 against the dollar in offshore markets on Tuesday, broke through the same barrier in Chinese markets on Wednesday, then hit a five-year high against a basket of trading partners a day later.

“Even if the Fed has started talking about tapering or starting tapping, its balance sheet will continue to climb – the dollar will continue to weaken as markets get used to the idea,” said Gao Qi, strategist in currencies at Scotiabank in Singapore. This will allow the yuan to rise to 6.2 by the end of the year, he said.

In the short term, Gao lowered his target of a short-term yuan-dollar offshore trade to 6.3. “An orderly appreciation of the yuan is acceptable to the Chinese authorities, but one-sided speculation will continue not to be permitted by the PBOC as before,” he said.

The target of 6.2 is also shared by other banks, including Westpac Banking Corp.

Xia Le, chief economist for Asia at BBVA Hong Kong, said that while the yuan could climb to 6.3 per dollar by the end of the year, the central bank will not allow a “rapid rally continues indefinitely”.

“The trade tensions between China and the United States have not been resolved and this will hurt exports,” he said. “When supporting factors such as the strength of exports weaken in the future, then China will see rapid capital outflows and rapid depreciation of the yuan.”

(Updates with details of PBOC statement in third paragraph, analyst comments in fourth paragraph)

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