SHANGHAI: China’s yuan leapt to a seven-month high against the dollar on the last trading day of the year on Friday, underpinned by rising market expectations that the US Federal Reserve could begin monetary easing soon.
However, the Chinese currency still looked set for the second straight yearly drop.
The yuan had a very volatile year in 2023.
A sputtering domestic economic recovery and wide yield differentials with other major economies, particularly the United States, pressured the yuan to lose 6.14% against the dollar at one point before paring much of the losses due largely to signs of a Fed pivot.
Many market participants now expect the shrinking yield gap between the world’s two largest economies to alleviate the yuan’s downward pressure into the new year.
“The People’s Bank of China (PBOC) has not reached the trough of its easing cycle but the Fed has likely peaked in its rate trajectory,” Maybank analysts said in a note.
“We expect rate differential between the US Treasuries (UST) and Chinese government bonds (CGBs) to narrow further, driven more by the moves of US treasuries.”
Prior to market opening on Friday, the PBOC set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at a seven-month high of 7.0827 per dollar, 147 pips firmer than the previous fix 7.0974.
The strengthened midpoint lifted the yuan’s value against its major trading partners. China’s trade-weighted yuan basket index rose to 97.42 on Friday, but it was down 1.27% this year, according to Reuters calculations based on official data.
In the spot market, both onshore and offshore yuan jumped to their highest levels in nearly seven months.
The onshore yuan opened at 7.0967 per dollar and surged to a high of 7.0860, the strongest level since June 2.
By midday, it was changing hands at 7.0976, 148 pips firmer than the previous late session close. And if the spot yuan finishes the late night session at the midday level, it would have lost 2.78% to the dollar for the year, booking the second straight yearly drop.
Its offshore counterpart followed the strengthening trend to hit a high of 7.0876 per dollar in morning deals, the strongest level since June 2. It last traded at 7.0982 around midday.
“It marks a perfect ending of the year,” said a trader at a foreign bank, referring to the strong bounces in the yuan and closing gap between onshore, offshore and the official guidance rates.
However, trading was generally tepid given many market participants are already on their year-end holidays, some dealers said, but they expect the recent yuan strength to sustain into the new year with more corporate yuan buying.
Chinese exporters usually convert more of their foreign exchange receipts into the year-end and Lunar New Year holidays for various payments including year-end bonus handouts to employees.
With the absence of significant corporate conversions over the past few weeks, traders expect most of them may emerge at the start of 2024. The week-long Lunar New Year holidays start on Feb. 10.
“We hold a positive outlook for the yuan against the dollar, due to the considerations of a gradual and more balanced economic recovery, narrower negative yield spread between China and US, recovering market sentiments towards Chinese economy and assets, and the significant underweight of Chinese assets,” said Lin Li, head of global markets research for Asia at MUFG.
“In addition, we expect some recovery in foreign direct investment (FDI) into China in 2024.”
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