MNI: Yuan Finds A Range On Improved Economic Sentiment

The Chinese yuan is returning to a two-way range against the U.S dollar as market sentiment bets on improved fundamentals after the central bank further moved to bolster the economy, and as an end to two months of strict lockdowns in Shanghai is in sight, market analysts said.

Analysts predicted USD/CNY may trade in a volatile range of CNY6.6 to CNY6.85 in the short term. Even though there is still depreciation pressure, the possibility for the yuan to break the level of CNY7.0 against the dollar in the rest of this year is low.

In addition to the soft dollar performance, analysts attributed a recent yuan rally to steps taken by monetary policymakers in China to kickstart an economic rebound.

A 15bp LPR cut, the most since August 2019, illustrated the PBOC’s intention to boost the property sector and market sentiment, resulting in an instant CNY14.2 billion of inflow last Friday, the biggest daily capital inflow so far this year, (See MNI STATE OF PLAY:PBOC 5-Year LPR Cut To Boost Property Demand).

CNY SURGE

CNY surged 938pips last Friday, closing at CNY6.6740 against the greenback in the biggest daily rally since October 2020, when the PBOC announced the reduction of the five-year and above tenors of its loan prime rate.

The yuan has continued those gains, USD/CNY dropping to as low as CNY6.6441 on Monday, after rallying as much as 1,090pips, or 1.44%, last week. USD/CNY closed at 6.6737 at 16:30pm Beijing time，a bit higher than 6.6671 on Tuesday.

The PBOC’s rate cut last week helped push up the yuan, said Li Liuyang, FX analyst at China International Capital Corp, pointing to pandemic recovery signs, which are supportive factors for the yuan. Li said a further gain of the currency to CNY6.60 against the dollar is possible in the short term, and within a range at the weaker end of CNY6.77.

FUNDAMENTAL FACTORS

According to Ping An Securities, the LPR cut bolstered chances of more rapid credit expansion, pushing up China government bond yields and equities last Friday.

The brokerage estimates the rapid rise from USDCNY 6.3 to CNY6.8 within a month would be over and the yuan will be more driven by dollar index performance, capital inflow and outflow levels and the export outlook.

The PBOC would also likely act if USD/CNY breaks the level of CNY6.80 and approaches CNY7.0, the brokerage noted, pointing out the central bank adjusted the reserve ratio for forward FX operations in 2018 and 2020 respectively around the level of 6.8.

The PBOC lowered lenders’ FX reserve ratio to curb the yuan weakness on April 25, which sent a signal to the market of discomfort with rapid depreciation rather than an actual stepping in.

The central bank however showed tolerance in April as the daily yuan reference fixing dropped by 4.1% against the dollar, the second largest monthly decline since Aug. 11, 2015, when the PBOC surprisingly devaluated the currency.

ROOM FOR TOLERANCE

Guan Tao, a former official at the central bank, said there was no panic selling of the yuan, which gave more room for the central bank’s tolerance, as actual yuan purchases by bank clients remained robust last month, according to the State Administration of Foreign Exchange.

In addition, foreign investor sentiment to the domestic market has seen an improvement. China saw a net capital inflow last month into its equity market, while foreign investors continued to reduce holdings at a slower pace in the bond market due to the reverse of the yield spread between China and the U.S.

Lian Ping, the head of Zhixin Investment Research Institute, predicted the yuan would trade in a CNY6.2 to CNY6.8 range for the whole year and its flexibility would further increase.

In the long run, China government bonds have been included by the major international indexes, including the JP Morgan Government Bond Index and Bloomberg Barclays Global Aggregate Index, adding to capital inflows.