SHANGHAI: Spot yuan rose versus the dollar on Friday, hitting its highest intraday level in nearly four months after the US Federal Reserve announced a new round of aggressive monetary stimulus, changing traders' calculations for the future value of Chinese currency.
"Welcome to the world's next asset bubble, version 3.0," said a dealer at a Chinese commercial bank in Shanghai.
"With a cheaper dollar, China no longer needs to worry about the yuan depreciating more. Instead, it might need to start worrying about the negative impact of a strengthening yuan on exports."
Speculation that the Fed would conduct a third round of easing (QE3) has been steadily squeezing spreads between spot yuan and one-year dollar/yuan non-deliverable forwards (NDFs) for the past two weeks, as expectations for future yuan depreciation eased in anticipation of an impending flood of dollars, traders said.
The latest easing package will inject $40 billion dollars into the US financial system every month until employment shows signs of sustained recovery.
This increase in net dollar supply will weaken the greenback's exchange value globally, and traders said this will revive interest in riskier yuan assets which had fallen out of popularity in the first half of the year as corporates and sovereigns fled to dollars.
Spot yuan was trading at 6.3196 versus the dollar at midday, up from Thursday's close of 6.3296, after hitting an intraday high of 6.3188, its strongest level since May 21.
Offshore, one-year dollar/yuan NDFs dropped to 6.4052 from 6.4170, with their implied yuan depreciation over the next 12 months lessening to 1.3 percent, down from 1.5 percent. However, one-year forwards also increasingly express the impact of differing interest rates and no longer serve as simple indicators of appreciation or depreciation.
Before trading began, the People's Bank of China set the yuan's midpoint at 6.3317, slightly stronger than Thursday's 6.3338.
END OF SHORTING YUAN
A strengthening dollar trend that began in late April and lasted for three months had driven the yuan down down 1.6 percent against the dollar for the year by late July.
Traders and economists said that many Chinese corporates had taken overly aggressive short-dollar positions earlier in the year, in anticipation of further yuan appreciation, but the Greek debt crisis, by pushing up the value of the dollar index , put a squeeze on those positions. As corporates sold yuan and held dollars to rebalance, the yuan came under market-driven depreciation pressure.
While the yuan has regained much of its lost ground since then, it is still down 0.4 percent so far this year.
"QE3 has put an end to dollar strengthening for the foreseeable future," said a dealer at an Australian bank in Shanghai.
"We still see limited potential for the yuan to appreciate sharply due to China's economic slowdown, but it's now possible for the yuan to remain stable for the rest of this year."
Traders' forecasts for the yuan's performance against the dollar have shifted several time so far this year, driven by volatile global and Chinese economic and market conditions.
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