SHANGHAI: China's yuan strengthened on Wednesday, with both onshore and offshore units touching their firmest levels against the dollar in more than three-and-a-half years after the central bank set its daily fixing at a more than six-month high.
The People's Bank of China set the yuan's midpoint rate at 6.3677 per dollar prior to market open, its strongest since June 1, amid what traders said was strong corporate dollar sales ahead of year-end.
Traders said FX settlement demand would continue to boost the yuan, potentially pushing it through the 6.35 per dollar level.
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"It's all about dollar settlement, and the yuan will continue to strengthen if the big banks don't block it," said a trader at a foreign bank.
Ken Cheung, chief Asian FX strategist at Mizuho Bank, echoed suggestions that real demand from FX settlement would continue to support the yuan, and noted that a divergence in monetary policy between the PBOC and the US Federal Reserve for now "appears to take a backseat" in driving exchange rate moves, despite a cut to banks' reserve requirements announced this week.
"The RMB rally could be driven by the USD diversification flow and the inflow to RMB assets would be long term which should prove to be less sensitive to the monetary policy divergence and yield differentials. Second, market participants may be still waiting a clearer signal of PBOC's easing shift," he said.
Cheung said verbal intervention by the PBOC to contain appreciation expectations was possible, but actual policy changes remain unlikely.
Spot yuan opened at 6.3629 per dollar on Wednesday and strengthened to 6.3515 per dollar, its firmest since May 15, 2018. By midday it had given up some gains to trade at 6.3540, 118 pips stronger than Tuesday's late session close.
Offshore yuan firmed to 6.3509 per dollar, its strongest since May 23, 2018, and was trading at 6.3523 per dollar at midday.
A broad dollar index fell to 96.155 from the previous close of 96.283.
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