SHANGHAI: China’s yuan pulled back on Friday from a one-week high against the dollar as the greenback found support, with traders and analysts seeing little room for further strong gains.
The dollar index, which measures the currency against six peers including the Japanese yen, had fallen overnight to a one-week low against major peers following a mid-week US Federal Reserve rate hike that matched market expectations.
On Friday, the dollar index rose 0.65% to 104.31 as the yen retreated sharply after the Bank of Japan kept its ultra-easy policy unchanged.
China’s yuan climbs to week high after expected Fed move
Traders said that a bull market for the dollar is here to stay given that Fed officials are flagging a faster path of US rate hikes to come, while the Bank of Japan maintains ultra-low rates.
Market sentiment around near-term potential gains for the yuan remains cautious.
“There’s still a limit to the downside for the dollar, so the yuan won’t be able to gain too much. It’s still going to be range bound in the near term,” said a trader at a foreign bank.
The yuan is also at historically elevated levels against a trade-weighted basket of currencies. Reuters calculations put the CFETS yuan basket index at 101.91 on Friday.
“The more the yen weakens the more it raises concerns about competitive devaluations in Asia with China’s renminbi one obvious point of focus,” said Christopher Wood, head of global equity strategy at Jefferies.
“There is no doubt that 7 is a key psychological level for the Chinese currency against the US dollar, though it also should be remembered that the PBOC is technically managing the currency against its CFETS trade-weighted index, of which the yen constitutes 10.8%.”
Longer term, some traders and analysts see an upside for the yuan as the domestic economy recovers from COVID-19 lockdowns. Recovering exports and more capital inflows into Chinese equities could also lend support, said Qi Gao, Asia FX strategist at Scotiabank.
“Equity inflows are likely to continue into Q3, offsetting bond outflows. I expect the yuan to be stronger this year-end compared to its current level,” he said.
Before the market open on Friday, the People’s Bank of China set the yuan’s daily midpoint at 6.6923 per dollar prior to market open, its firmest since June 9.
Onshore spot yuan opened at 6.6900 per dollar, its strongest level in a week, before giving up ground to trade at 6.7027 by midday, 13 pips stronger than Thursday’s late session close.The offshore yuan weakened to 6.7077 per dollar from its previous close of 6.6840.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.6928.