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Yuan extends gains on firmer PBOC guidance as dollar weakens

SHANGHAI, Dec 2 (Reuters) – The yuan extended gains to a
more than one-week high against the dollar on Wednesday, after
the central bank set a much stronger official guidance rate,
reflecting broad greenback weakness.

The dollar stayed near a 2-1/2-year low as investors
cautiously eyed developments in talks about further fiscal
stimulus from the United States.

Currency traders said the weakness in the greenback, along
with market expectations for further monetary easing by the U.S.
Federal Reserve and improving economic fundamentals in China
could allow the Chinese unit to rise further.

Declines in the dollar overnight prompted the People’s Bank
of China (PBOC) to lift its midpoint rate by the most
in nearly a month to 6.5611 per dollar, 310 pips, or 0.47%,
firmer than the previous fix of 6.5921. Wednesday’s fixing was
also the strongest since Nov. 19.

The onshore yuan opened at 6.5609 per dollar and
rose to a high of 6.5524 at one point in morning trade, the
strongest level since Nov. 23. By midday, it was changing hands
at 6.5533, 167 pips firmer than the previous late session close.
Traders said the strength in the Chinese unit was reacting
to the weaker dollar, but some investors became cautious as both
onshore and offshore yuan were approaching their psychological
resistance soon.

“The immediate target remains at the recent low around
6.5300, with the risk-reward favouring a break-out lower (for
USD/CNH),” Terence Wu, strategist at OCBC Bank said.
The offshore yuan followed the strengthening trend
to a high of 6.5425 per dollar on Wednesday morning, the
loftiest level since Nov. 18. It traded at 6.5429 as of midday.
Still, economists and analysts expect continued economic
recovery from coronavirus disruption in China could extend the
yuan’s recent rally.

“On the fundamental side, China’s growth is likely to remain
above-trend in the coming months,” analysts at MUFG Bank said in
a note, expecting the yuan to move in a range of 6.45 to 6.75
per dollar in December.

Chinese currency started its appreciation trend in June and
booked six straight months of gains, the longest such winning
streak since late 2014. It has risen nearly 9% to the dollar
since late May.

The yuan market at 0400 GMT: 
ONSHORE SPOT:

Item Current Previous Change
PBOC midpoint 6.5611 6.5921 0.47%

Spot yuan 6.5533 6.57 0.25%

Divergence from -0.12%
midpoint*
Spot change YTD 6.25%
Spot change since 2005 26.30%
revaluation

Key indexes:

Item Current Previous Change

Thomson 95.51 95.68 -0.2
Reuters/HKEX
CNH index
Dollar index 91.137 91.188 -0.1

*Divergence of the dollar/yuan exchange rate. Negative number
indicates that spot yuan is trading stronger than the midpoint.
The People’s Bank of China (PBOC) allows the exchange rate to
rise or fall 2% from official midpoint rate it sets each
morning.

OFFSHORE CNH MARKET   

Instrument Current Difference
from onshore
Offshore spot yuan 6.5429 0.16%
*
Offshore 6.7132 -2.27%
non-deliverable
forwards
**

*Premium for offshore spot over onshore
**Figure reflects difference from PBOC’s official midpoint,
since non-deliverable forwards are settled against the midpoint.

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