China’s yuan kept strengthening sharply against the US dollar on Friday after blowing past the key 6.5 per dollar level a day earlier, and was headed for its best week since revaluation in 2005.
The yuan’s year-to-date gains against the dollar have topped 7.5%, easily erasing the 6.5% loss suffered last year.
The Chinese currency, coming back into the global spotlight, has strengthened more than 2,600 pips since the beginning of the August, an unusual run given that it normally moves in a narrow range.
Prior to Friday’s market opening, the People’s Bank of China raised its official yuan midpoint for the 10th straight session, to 6.5032 per dollar, the strongest since May 12, 2016.
The last time the midpoint had a stronger fixing for 10 consecutive days was in December 2010.
But Friday’s midpoint – 237 pips, or 0.36% firmer than the previous one of 6.5269 per dollar – was weaker than market expectations, traders said.
Their forecasts had suggested the guidance might be firmer than 6.5 per dollar, the level the yuan broke through on Thursday, for the first time since May 2016.
“It seems that the PBOC intends to smooth the yuan appreciation pace as rapid appreciation in the yuan could harm growth, especially for the exports sector,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
He said he had expected Friday’s midpoint to be around 6.49 to the dollar.
The weaker-than-expected midpoint failed to cool the strong momentum in the spot market.
The onshore spot yuan opened at 6.4800 per dolla and surged to a high of 6.4478 at one point before changing hands at 6.4600 at midday, 250 pips firmer than the previous late session close and 0.66 percent stronger than the midpoint.
“It seems that the PBOC intends to smooth the yuan appreciation pace as rapid appreciation in the yuan could harm growth, especially for the exports sector”
The intraday levels were the strongest seen December 2015.
If the spot yuan finishes the late night session at the current level, it will have gained 1.54% for the week, the highest weekly gain since the yuan was revalued in July 2005. Last week, the yuan gained around 1.4%.
At midday, the offshore yuan was trading 0.03% weaker than its onshore counterpart at 6.4619 per dollar.
Traders said Friday’s yuan strength was supported by corporate dollar sales, along with broad weakness in the dollar in global markets following gains in the euro, as a policy meeting by the European Central Bank gave bulls cause for short-term optimism.
A trader at a Chinese bank in Shanghai said the market had believed that the 6.5 per dollar level was the bottom for the yuan. But since the spot rate breached that level on Thursday, participants now were waiting to see when authorities would “start to purchase long dollar positions stuck at state-owned banks”, he said.
Another trader at a Chinese bank said companies rushed to sell dollars to reduce exchange losses on Friday, while proprietary trade was not affected after the yuan hit new highs against the greenback.
China’s foreign exchange reserves edged up for a seventh straight month in August as a surging yuan and tighter regulations signal the tide may be turning in China’s battle against outflows.
On Friday morning, official data showed that China’s exports rose by 5.5% from a year earlier, below market expectations, while imports beat forecasts, growing 13.3% last month.
The August trade data had no impact on the spot yuan trade, according to market participants. But analysts said the soft China export figures should highlight the overshooting risk in the yuan.
“We remain cautious about the RMB overshooting risk and not favour to chase the RMB rally at this level,” Mizuho’s Cheung said in a note.
The Yuan is significantly over-valued, not good for Chinas export. There are several bubbles in the Chinese economy that must be resolved. China need to consolidate and write off a lot of bad debt, a weaker Yuan would be most helpful.