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Markets

Yuan gives back this year's gains as dollar strength prompts revised forecasts

  • Wang Ju, a senior FX strategist at HSBC, also expected the yuan to weaken from current levels.
Published March 8, 2021

SHANGHAI: China's yuan gave up on Monday all the gains it has made this year, with a recent rebound in the US dollar shaking many market participants' expectations for a firmer Chinese currency this year.

The onshore spot yuan finished the domestic trading session at 6.5233 to the dollar, its weakest close since Dec. 31, 2020, down 268 pips or 0.4% softer than the previous late night close.

Its offshore counterpart traded at 6.5388 to the dollar by about 0830 GMT, compared with the previous close of 6.5142.

Traders said the currency weakness was a reaction to broad strength in the dollar, which hovered near three-month highs after data showed jobs growth in the United States beat expectations in February, while Senate passage of a bumper stimulus bill sparked another sell-off in the bond market.

The recent bounce in the dollar and fast rising US yields have prompted many investors to re-evaluate forecasts for the yuan, which the market had expected to be stronger for the remainder of this year.

Ji Tianhe, head of FXLM strategy for global markets China at BNP Paribas in Beijing, has shifted to a bearish outlook for the yuan against the backdrop of a narrowing yield gap between China and the United States, a stronger dollar and importers' rising demand for the greenback.

"Financial conditions are unlikely to be too tight and will therefore allow the real economy to deleverage smoothly," Ji said.

"Moreover, we think the risk for USD/CNY is to the upside where the PBOC is concerned, as it is likely to allow more capital to flow out, than less," he said, adding that he expected the yuan to weaken to 6.8 per dollar.

Wang Ju, a senior FX strategist at HSBC, also expected the yuan to weaken from current levels.

"We have the view that USD/RMB will trade two-way in 2021 and end the year at 6.60," she said in a note.

"The return of USD strength has been a bit earlier compared to our expectations. Exports strength could be overshadowed if USD yields keep going higher."

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