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Spread dominates the overnight session

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Approaching The Base Of The Bull Channel

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(F2) Bounces Off Yesterday’s Low

MARKET INSIGHT

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     BEIJING(MNI) - The yuan's recent strengthening against the U.S. dollar
should not continue for long, a Chinese policy advisor and a former forex
official told MNI, with the advisor adding that the People's Bank of China would
prefer to keep the exchange rate within the range of 6.9-7.1 to the greenback.
     The central bank will want to avoid any significant yuan rally, said Zhang
Ping, deputy head of the National Institution for Finance and Development under
the Chinese Academy of Social Sciences. The central bank would prefer to cap the
currency's advance to 6.9, he said, speaking after both the onshore CNY and the
onshore CNH rates hit near six-week highs on Wednesday following the Federal
Reserve's emergency 50-basis-points rate cut to contain the impact of
coronavirus on the economy and markets.
     China's economic fundamentals should not support much further currency
strengthening, Zhang said, particularly as it has been the country hardest hit
by the virus. Likely PBOC rate cuts, and a possible current account deficit in
coming months as the now global epidemic saps trade, should also tend to weaken
the currency, at least in the first half of the year, he said.
     The gap in yield between benchmark 10-year Chinese government bonds and
10-year U.S. Treasury debt jumped to 182bps earlier this week, the widest since
2015, as the Fed eased, driving demand for Chinese currency.
     --TWO-WAY TRADE
     Guan Tao, former Director General of Balance of Payments at the State
Administration of Foreign Exchange, said the yuan would be a two-way trade as
the impacts of the virus outbreak ease. The currency strengthened through 7 to
the dollar at the end of February as containment efforts drastically slowed the
spread of the disease in the country, he said.
     While the PBOC has to remain alert to any acceleration of the cross-border
capital movement, it should focus mainly on the domestic economy and prices,
Guan said, urging continued liberalisation of foreign exchange markets. The
central bank's tolerance of FX movements was highlighted last August, when the
yuan broke through the 7 level investors had regarded as key.
     Well-known Chinese forex expert Zhao Qingming, though, saw continued
support for the yuan. The dollar index, DXY, peaked at 99.9 earlier this year,
he said, adding that he expected Chinese output to rebound from the second
quarter. Trade and political relations with the U.S. could however prompt
volatility, he said.
     USDCNY closed at 6.9425 Thursday at 16pm Beijing time, up 0.14% from
Tuesday when the onshore yuan rose 0.7% versus the greenback to the strongest
since Jan. 22, the day before China locked down Wuhan to stop the virus from
spreading. The PBOC today set the CNY fixing at 6.9403 per dollar, 0.16% firmer
than the previous fix of 6.9514.
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$]