SHANGHAI: China's yuan hovered at a three-week high against the dollar on Monday on rising hopes for an improvement in Sino-US relations, while sightly better-than-expected October activity indicators also lent support to the local currency.
Traders said the main focus would be a virtual meeting between US President Joe Biden and his counterpart Xi Jinping on Tuesday, with some investors raising their bets for partial removal of tariffs.
"If Sino-US relations improve further, the yuan will continue strengthening," said Li Liuyang, chief currency analyst at China Merchants Bank, though he added that 6.35 per dollar could provide strong resistance for the yuan in the near-term.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3896 per dollar, 169 pips or 0.26% firmer than the previous fix of 6.4065, the strongest since Oct. 27.
The firmer official guidance pushed the yuan's value against it major trading partners to 101.33, the highest level since Dec. 18, 2015, according to Reuters calculations based on official data.
Until this year a reading of 98 on the trade-weighted CFETS yuan basket index was "about the maximum we thought the government would tolerate" said Arthur Kroeber, head of research at Gavekal, speaking at a briefing in Shanghai.
"(But) exports are very strong and capital inflows seem to be decent ... so we're not looking at a situation where there's massive depreciation."
In the spot market, the onshore yuan opened at 6.3798 per dollar and was changing hands at 6.3821 at midday, not far from a high of 6.3782 hit on Oct. 25.
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Relations between Beijing and Washington have been one of the key factors influencing the yuan over the past few years, analysts and traders said.
The US-China trade talks, along with optimism about a pause in China's regulatory clampdown and a potential pick-up of bond inflows could support the yuan in the near term, HSBC said.
"However, assuming that there will not be a dramatic shift in US-China relations, we doubt that USD/RMB and the DXY index can keep diverging from each other," analysts at the US investment bank said in a note, adding that the yuan already appeared to be slightly overvalued.
"We believe China has been subtly leaning against the RMB's outperformance, via the fixings for instance," they added, expecting the yuan to trade at 6.4 at end-2021.
On the macroeconomic data front, China's industrial output grew at a surprisingly faster pace in October, despite fresh curbs to control COVID-19 outbreaks and supply shortages that have threatened to undercut the recovery in the world's second-largest economy.
"Even as supply side pressures should continue to ease, we expect year-on-year growth in industry and the wider economy to slow further in Q4 and early 2022 amid the real estate slowdown and impact of the current wave of COVID outbreaks," said Louis Kuijs, head of Asia economics at Oxford Economics.
"In response, we expect policymakers to take more easing measures to prevent growth from falling too much; the impact should largely kick in early next year."
By midday, the broad dollar index stood at 95.012, while the offshore yuan was trading at 6.378 per dollar.