Yuan Hits Strongest in Over a Year as Flows Offset Fundamentals

(Bloomberg) -- The Chinese currency extended a recent advance to levels unseen in more than a year, as traders mulled signs of corporate buying amid broad dollar weakness.

The offshore yuan gained 0.3% to 7.0752 per dollar, its strongest since June 2023. The currency has surged around 2% in August to erase its losses for the year and is now up about 0.7% in 2024 against the faltering greenback. 

Alongside its Asian peers, the yuan has benefited from rising expectations the Federal Reserve will soon cut interest rates, which has prompted traders to sell the dollar and buy local currencies. With Chinese exporters sitting on a hoard of foreign exchange, speculation has mounted they too will look to sell more dollars amid the shift in sentiment.

And the Chinese currency was boosted by an unwinding of a once crowded strategy that involved traders borrowing the yuan cheaply and selling it against a higher-yielding exchange rate. 

“With a turnaround of bearish yuan sentiment, the recent stimulus measures should pose stronger support on China growth prospect,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank. “If significant yuan appreciation materializes, it could prompt exporters to covert FX back into the yuan and push the currency to even stronger levels.”

Still, the yuan will continue to face pressure from sluggish growth, as consumer spending slows and President Xi Jinping’s government avoids major stimulus. And traders are also waiting to see whether the People’s Bank of China pushes back on the managed currency’s strength, wary of its impact on the country’s exporters.

State-owned banks bought the dollar at around 7.0910, limiting appreciation in the yuan, according to traders who asked not to be identified commenting on the FX market. 

The onshore yuan edged higher after the PBOC raised its daily reference rate to a two-month high of 7.1124 on Friday.

“Further rally will be slower and more volatile, given spot is already trading below fixing,” said Becky Liu, head of China macro strategy at Standard Chartered Bank. “We think dollar-yuan will be lower by year end, at 7.0-7.1.”

--With assistance from Ran Li.

(Updates with unwinding of carry trade, trader voice and another analyst quote.)

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