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The yuan is likely to peak against the dollar by the second quarter as exports lose steam and the People’s Bank of China monitors conditions to curb any overshoot of the currency, policy advisors, FX analysts and traders told MNI.

Estimates for USD/CNY ranged from a low of 6.20 to 6.70 for the year with the rate seen around 6.50 at the end of the first half. A key level in the short term is 6.30, they said. (see: MNI: Chinas Yuan Draws Support From Uncertainty, For Now.)

The PBOC said this month it would act to stop any “one-way bet” on the exchange rate, and policy steps that could come into play include hiking the reserve requirement ratio for foreign currency deposits and lowering the CNY fixing price to guide market sentiment, said an advisor with knowledge of central bank operations

The CNY hit an over three-year high against the dollar on Wednesday at 6.3200 amid a dovish policy stance, after PBOC rate cuts over the past few weeks and more possible.

However, the PBOC might tolerate a stronger yuan in the nearer term in order to cushion depreciation expected later this year, the policy advisor said, as a weaker currency could be a bigger headache for the central bank, the advisor said.

An historic trade surplus, which contributed over 4% of GDP growth in 2021, saw the yuan stay shy of the 6.18 level reached in 2015, indicating investor wariness towards potential financial and structural risks from too strong a currency, he said.


A trader at a major Chinese bank said the PBOC has been “uncomfortable” with yuan appreciation even when it raised the FX reserve requirement ratio in December when USD/CNY broke 6.35. The PBOC wants to see increased “flexibility” of the currency while avoiding sharp moves, he said, predicting a further FX RRR hike.

Last year’s “abnormal” trade surplus is also unlikely to be repeated in 2022, advisors told MNI. Customs data showed freight volume fell 11% year-on-year in December, even though exports jumped 20.9%, implying that high prices paid overseas for goods contributed to the surge.

An FX analyst said China exports may see a clear turning point in March if the Federal Reserve starts interest rate hikes to curb inflation as expected.

The U.S.-China yield spread has narrowed to about 80bps as China’s 10-year government bond yield has dropped to around 2.7% while U.S Treasuries approach 1.9%, the analyst said, adding that experience shows the cushion for a stable yuan is about 80pbs.

The PBOC is expected to cut policy rates by another 20bps during 2022 to boost market confidence, with the next cut likely to come before the Fed begins to hike, the trader said.

A stronger yuan also depends on the performance of the USD, which may come under pressure if the Fed falls short of market expectations of roughly four rate hikes this year. U.S. mid-term elections later this year could also feed uncertainty over U.S.-China trade.


A temporary factor supporting the yuan came ahead of the seven-day Lunar New Year holidays as companies needed to sell dollars for yuan to pay salaries and bonuses, drawing on dollars accumulated from exports, several of the sources said.

According to the State Administration of Foreign Exchange, banks sold a net of CNY329 billion worth of dollars last month, a peak for the year, with strong selling expected in January.

Excess dollars in the domestic market are seen as the biggest contributor to last year’s yuan rally, with the PBOC mopping up some of the liquidity to slow yuan appreciation and inject liquidity to the economy.

The PBOC balance sheet’s FX pile stood at the equivalent of CNY21.29 trillion in December, the fourth straight monthly increase. It added CNY155.9 billion in 2021, ending six years of declines.


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