MNI: China Yuan Marks Holiday Season With Strong Rally

     BEIJING (MNI) - The Chinese yuan has made the most of the festive season,

surging to a recent high as the U.S. dollar has lost steam and trading volume

has weakened during the Christmas and New Year holiday.

     On Christmas day, an ordinary trading day in China, the onshore yuan surged

to its strongest level in three months, breaking through the 6.54 threshold from

about 6.57 and ending the day at 6.5404, the strongest close since Sept. 13. The

appreciation of 283 pips on the day was the biggest daily rise since Oct. 10.

     The offshore yuan also showed some holiday vigor on Christmas, rising 127

pips to 6.5519, the highest since Sept. 15.

     In the five trading days since Dec. 19, the onshore yuan has appreciated

766 pips, approximating the  838-pip rise during China's Sept. 29-Oct. 10

national holiday.

     --OUTSIDE SUPPORT

     "The seed has been planted for the rising momentum of the yuan after the

U.S dollar index was slightly propped up after the U.S. [Congress] passed

President Donald Trump's tax-cut plan last week," Li Liuyang, chief forex

analyst with China Merchants Bank, told MNI. "The weak impact of the Fed's rate

hike [in mid-December] and the Trump government's fiscal adjustments to the

dollar index have disappointed the market, which has further reversed

expectations for yuan depreciation," he said.

     Since Dec. 20, when the U.S. tax-cut plan was finally passed, the dollar

index has moved within a range of 93.19 to 93.56, and it dropped 0.2% on Dec.

21, prompting many investors to hold their bets on a stronger dollar.

     A forex trader at a joint-stock bank told MNI that some investors who were

long on the U.S. dollar have started to clear their positions, a result of the

negative outlook for the dollar.

     "Our clients are increasingly selling dollars amid increased demand for the

yuan at the year-end and gloomy expectations for the dollar," he said. This "has

further pushed up the yuan in the short term," the trader said.

     Slim trading volume during the holiday season has also contributed the

yuan's rally. On Dec. 25, yuan trade volume totaled $16.33 billion, a drop of $2

billion from the previous day and the lowest since Oct. 9.

     Market trading "is already very thin, so any dollar sales transactions

could trigger big volatility," the trader said. "I cannot see a clear trend so

far, so I hold no positions and will wait until after the New Year's holiday" to

make any trades, he noted.

     --CEWC BOOST

     Market expectations have also been bolstered by the outcome of China's

Central Economic Work Conference, which reiterated its focus on financial

de-risking for the coming year. The tighter monetary policy is expected to

further push up lending rates, further widening the spread between Chinese and

U.S. interest rates and triggering an even stronger yuan.

     However, the sudden and unexpected surge of the yuan exchange rate could

fade, as both the People's Bank of China and the market in general were not

prepared for such a gain, and could act to pull it back.

     "We expect the [PBOC's] 'counter-cyclical' factor to be put to work if the

yuan continues to rise the rest of this week, as China needs to maintain the

stability of the yuan against the currency basket," said Li, the China Merchants

Bank analyst. "The CFETS index is likely to rise above 95.20 this week, which

would be out of the 'tolerable range' of the PBOC."

     The yuan fixing over the past five trading days has also served as a guide

for the renminbi's strong appreciation. The fixing rate strengthened 746 pips

during the period to as high as 6.5683, the strongest since Sept. 20. 

     --REVERSAL OF FORTUNE

     But some analysts are wary of the surge. Han Huishi, a forex analyst with

China Construction Bank, said in a note that the 6.60 mark is an important

psychological threshold for the market, and that the consensus is that any

strengthening beyond 6.55 would be an "overshoot."

     Han said he expects the yuan to depreciate back to 6.60 in the short term

absent strong support from U.S. dollar sales.

     The yuan has had an expectedly strong year in 2017. As of Dec. 25, the

currency has rallied 4,091 pips, ending three consecutive years of depreciation.

In an exclusive interview with the MNI at the end of November, a PBOC source

said he expected the yuan would break through the 6.60 level by the end of 2017

-- a prediction that now looks prescient.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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