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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
"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.
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.
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