SHANGHAI: China’s yuan extended its winning streak on Tuesday, reaching a near four-month high against the dollar, as it gained from a much stronger midpoint fixing and more stable Sino-US ties.
Markets were surprised the People’s Bank of China (PBOC) continued to support the yuan via its daily midpoint fixing despite the onshore yuan having strengthened nearly 2.4% to the dollar over the past week, traders and analysts said.
“It is surprising to see they keep lowering the fixing at this rate. To me, it looks like they are doing preparatory work ahead of its policy rate cut,” said Kiyong Seong, lead Asia macro strategist at Société Générale CIB.
Prior to market opening, the central bank set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1406 per US dollar, the strongest since Aug. 7. The gap between the fix and Reuters’ estimate narrowed to 271 pips from more than 700 pips just a day earlier.
When the external environment is favorable, the PBOC appears to strengthen the yuan as much as possible, Seong said.
The yield gap between 10-year US Treasuries and their China counterpart has narrowed to 174 basis points (bps) from 225 bps just a month ago.
“The strategy of buying time to wait for the dollar turn paid off once again,” said Christopher Wong, FX strategist at OCBC bank, adding that policymakers did similar moves last year before the dollar weakened in Oct. and Nov. 2022.
Spot yuan opened at 7.1315 per dollar and was changing hands at 7.1386 at midday, 269 pips stronger than the previous late session close and 0.03% firmer than the midpoint.
If it retains its gains, the onshore yuan will have a sixth straight winning session, the longest streak since January 2022.
The offshore yuan was trading only 14 pips weaker than the onshore spot at 7.14 per dollar.
The rally in offshore yuan was driven by a weaker dollar after markets repriced their expectations for US interest rates and improved sentiment towards China following the meeting between China President Xi Jinping and US President Joe Biden, said Khoon Goh, head of Asia Research at ANZ.
Exporters’ year-end hedging flows, easing Sino-US tensions, expected peaking in US yields and increased China stimulus are behind the (yuan) moves, said Ju Wang, head of Greater China FX and rates strategy at BNP Paribas.
Wang expected the yuan to continue to appreciate against the dollar to the 7-level by the end of 2024, with the key focus on Fed rate cuts and Asian export levels.