CHINA MONEY WEEK: Yuan Makes Its Break

--CNH Shrugging Of U.S. Yield Advantage

By Stuart Allsopp

     SINGAPORE (MNI) - The yuan hit a 6-month high today, extending the weekly

decline in USDCNH to 1.5%. It is difficult to pinpoint the exact reason for the

yuan's sharp appreciation, and we see this as a sign that the rally has further

to run.

     Thawing trade relations between China and the U.S. is the obvious trigger

but we have not yet heard anything substantial regarding a deal. The Fed's more

neutral rhetoric is another potential reason for the yuan rally, yet U.S. yields

have actually risen over the past week, even as Chinese yields have fallen.

     --INFLOWS RETURNING

     Our view is that after several months of capital outflows and a recovery in

the trade balance on the back of lower oil import costs, excessive bearishness

towards the Chinese economy is being priced in. The median forecast among

analysts is for the yuan to end the year at 6.8300, with very few seeing the

pair below current levels.

     The bullish technical break below neckline support from the August 2018

lows on Wednesday provided the trigger for the rally, and with sentiment

remaining sceptical, we maintain the bullish stance we outlined on Nov. 30 (see

'Clouds Part For A Yuan Recovery' on the Mainwire at 07:15 GMT).

     --RATE DIFFERENTIALS ARE A RISK

     One note of caution is the yuan's lack of support from U.S.-China yield

spreads. While this is by no means unprecedented it does suggest that the rally

faces risks from further easing expectations by the PBOC.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,MN$FX$]