MNI EXCLUSIVE: Yuan Seen Capped By 1994 High Of 6.1: Advisors

Increasing demand for cash ahead of the Chinese New Year may power a further leg of the yuan rally, but the currency should fluctuate in a wide band around its current level in 2021, with a lower trade surplus and rising U.S. yields weighing more on the exchange rate later in the year, policy advisors and forex analysts told MNI.

The yuan could vary from 6.1 to the dollar to 6.85 this year, following a 10.3% fluctuation from high to low in 2020, MNI was told. The People's Bank of China weakened the fixing for the third day in a row Monday, setting it at 6.4764.

Demand for yuan is now being pushed higher by firms needing to pay New Year bonuses, one advisor commented, adding that exporters have also been buying, after a period of hoarding foreign currency, to avoid realising losses on dollar depreciation.

But, while the yuan has strengthened sharply so far this year, breaking through the key 6.5 level which had proven effective resistance since November as the offshore USDCNH reached as far as 6.41, further room for gain may be limited. The Chinese currency could weaken as far as 6.8 later in the year if the U.S. economy makes a stronger-than-expected recovery or if Sino-U.S. tensions flare again, the advisor said.

A return to strong U.S. growth could push the yield on 10-year U.S. Treasury bonds above 1.5%, reducing the interest-rate spread with 10-year CGBs at 3-3.5%, the advisor noted. China's export performance could also weaken in the second half of 2020, he added.

LIMITED UPSIDE

Another policy advisor agreed that the yuan had relatively little upside, even if it could strengthen past 6.4 in the short term. The CFETS RMB Index of a basket of currencies of China's major trading partners may top around the 96 level which held in November, the advisor said. The weekly index decreased to 94.84 on Dec. 31 2020, up from 91.65 on Dec. 27, 2019.

The onshore USDCNY rate should not appreciate past 6.3 this year, according to an analyst at one of the big Chinese banks.

Advisors see little possibility of the yuan breaking the 6.0 level against the dollar this year as some expect considering 6.1 has been the strongest since 1994 when China unified its dual exchange rates by aligning official and swap centre rates. If it does break the 6.l level, it would plunge below 6 quickly and the PBOC needs to be ready for it, they said.

MEASURES

The PBOC, which says the yuan should remain "at a reasonable and balanced level," will not make any significant intervention to slow down the currency's gain, particularly as China waits for Joe Biden to take office in the U.S., the first advisor said. But the central bank may take some measures as it seeks to avoid one-way bets forming on the yuan, including measures to make it easier for capital to leave the country, whilst keeping an eye on inflows, another advisor said.

Last Tuesday, the central bank said it was easing restrictions on overseas lending by Chinese companies, and, two days later, it made it harder for them to borrow abroad.

For the moment, the yuan rally seems to have stalled, after USDCNY reached 6.42 on Tuesday, its strongest since mid-2018.

Wednesday's CNY fixing of 6.4604 was weaker than expectations, a forex trader said, adding that some state-owned banks had been buying dollars.