China's yuan flat but further gains expected on strong exports

SHANGHAI: China’s yuan held steady on Monday, hovering near the strongest level in 3-1/2 years against a softening dollar, as traders look for clues on the Federal Reserve’s rate path and China’s economic health.

Analysts say further gradual gains in the yuan is required to help Beijing avoid renewed trade friction as robust exports continue to widen China’s trade surplus.

“Without such a move, China’s large surpluses may generate even more protectionist responses from trading partners, threatening its access to external markets and its strong export performance,” Goldman Sachs said in a note.

On Monday, the onshore yuan changed hands around 6.74 per dollar in morning trading, barely changed from the last session’s close.

It touched 6.74400 per dollar at one point, the strongest level since February, 2023.

In the broader foreign exchange markets, the dollar drifted near a two-month low against major currencies as investors awaited this week’s inflation data for clues on the Fed’s policy path.

“Bets on rate hike have been reduced, but not called off,” Huatai Futures said in a report, adding this week’s US inflation data would be key to shaping expectations.

As for the yuan, “its strength is both a reflection of recent dollar weakness, and strong exports.”

China’s exports jumped 24% in July, beating expectations as the global AI infrastructure boom fuelled demand for high-tech goods.

Traders are also looking to a slew of July Chinese economic indicators for a clearer read on the economy’s strength.

“The July economic data is crucial,” Nanhua Futures said.

“If indicators fell broadly, fresh stimulus policies are expected around end-September.” In terms of the bigger picture, Goldman said strong exports and the yuan’s undervaluation argue for a measured rise in the Chinese currency over time.

Before market open, China’s central bank set the yuan’s guidance rate at 6.7884 per dollar, the strongest in 3-1/2 years.