HONG KONG: The Chinese yuan appeared set to register its third consecutive week of gains as the central bank signaled it was comfortable with the stronger levels as the economy was improving.
This week's rise saw the yuan opening and trading above the midpoint fixing for the first time since March 6, possibly signalling the start of a powerful rally as seen two years ago.
Investors have bought Chinese assets in recent weeks as recent strong economic data such as industrial production and fixed asset investment have indicated the government's efforts to accelerate spending are starting to pay off.
Stocks have gained 8 percent in three weeks while the Chinese yuan have gained more than 2.2 percent in trade-weighted terms in the last five weeks, according to BNP Paribas, marking a sharp turnaround from the weakness in the first half of the year.
On Friday, the yuan was changing hands at 6.1584 per dollar, stronger than Thursday's close of 6.1619. It was up 0.35 percent this week and hovering near the midpoint fixing after having broken it conclusively earlier this week.
With a surging trade surplus indicating a spreading recovery in the United States and other markets, strategists expect capital inflows from the current account to push the reminbi gradually higher in coming days.
China's export growth in July leapt 14.5 percent from a year earlier, nearly double the expected increase, while imports posted a surprising fall of 1.6 percent, the Customs Administration of Customs said on Friday.
"July's trade surplus hit a historical new high, which will add more pressure to to the yuan's appreciation in the coming months," said Zhou Hao, an economist at ANZ in Shanghai.
DEFINITE BREAK
The last time spot yuan crossed the midpoint during a similar rally was in September 2012, and it heralded the beginning of a long-running bull market in which the spot rate remained above the guidance rate consistently to gain more than 4.6 percent before peaking in mid-January 2014.
Perhaps in a nod to the appreciating currency this week, the People's Bank of China set the midpoint rate at 6.1562 per dollar prior to market open, stronger than the previous fix of 6.1670. The spot rate is currently allowed to trade 2 percent above or below the midpoint.
The yuan's recent rally, supported by signs of recovery in exports, has wiped out half of the 3.3 percent of losses incurred at the depth of its weakness in late April. That was when the PBOC punished speculators by engineering a dramatic and sustained decline in the exchange rate.
Traders pointed to the absence of China's central bank and its agent banks in the spot market in recent weeks as a sign authorities are willing to let the currency appreciate for now as the strong economic data indicated an appreciating currency was not hurting trade as yet.
"In hindsight, that explains the absence of bids in onshore USD/CNY, and we could be gearing up for a definite break of 6.1500 in the coming days," said Chester Liaw, economist at Forecast PTE in Singapore referring to the spot rate onshore.
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