Yuan Hits Three-Year High Amid Supportive Policy, Risk-On Buying

  • Chinese currency supported by strong exports, capital inflows
  • Receding concerns over omicron are fueling risk-on sentiment

China’s yuan advanced to the strongest level since May 2018 amid bets that monetary stimulus will sustain the nation’s growth and the new Covid variant will have a limited impact on the global recovery.

The onshore yuan gained as much as 0.3% to 6.3451 per dollar, breaching a year-to-date high reached in May. The move came as optimism that omicron will prove a manageable risk for the global economy damped demand for the dollar as a haven. Traders also became more confident over China’s growth after the central bank announced broad monetary easing this week.

The yuan has gained 2.8% this year, making it the best performer in Asia, thanks to inflows driven by robust exports and foreign purchase of higher-yielding onshore bonds. Confidence was further boosted this week when the Communist Party’s Politburo meeting concluded with a signal of more easing and a pledge to stabilize the economy in 2022. A lack of aggressive measures from the central bank to stall the advance also stoked bets that the appreciation would be sustained.

“Full bore risk-on it is,” said Alvin Tan, head of Asia foreign-exchange strategy at RBC Capital Markets. “The yuan’s carry is very appealing. And it’s fair to say that the market remains impressed by the central bank’s tolerance of persistent currency strength.”

The yuan gained 0.3% to 6.3484 as of 11:21 a.m. in London. Chinese banks’ proprietary desks stepped up sales of the dollar after the yuan breached this year’s high, a move that triggered even faster appreciation in the currency, according to three traders. They asked not to be identified as they aren’t authorized to talk about the foreign-exchange market publicly.

The outlook on the yuan depends on how much tolerance the People’s Bank of China has for its strength. So far, the recent appreciation was only met with mildly weaker-than-expected fixings and a gentle reminder about not making one-way bets. The policy makers may issue verbal warnings to contain the rapid advance, but won’t take more aggressive measures such as requesting lenders to hold more dollars, according to Ken Cheung, the chief Asia foreign-exchange strategist at Mizuho Bank Ltd.

The PBOC this week announced a cut to the amount of cash lenders need to set aside as reserves, suggesting Beijing is prioritizing growth over a crackdown on the sprawling property sector and technology industry. The looser monetary policy can act as a double-edged sword for the exchange rate in the medium term. While flush liquidity supply benefits the yuan by aiding growth, it could also hurt foreign demand for the currency as it reduces China’s rate premium over the rest of the world.

On Wednesday, the South Korean won and the onshore yuan led gains among emerging Asian currencies with a 0.3% advance.

Author: Tania Chen, Bloomberg

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