MNI: Yuan Seen As High As 7.0 After PBOC, Politburo Moves

The yuan is likely to strengthen over the rest of the year and could even breach 7.0 against the U.S. dollar as policymakers move to stabilise the currency and recent stimulus boosts sentiment, advisors and traders told MNI.

The politburo meeting on July 24 and recent central bank moves have supported the yuan since it reached what is likely to be its weakest point this year at 7.28 to the dollar at the end of June, a policy advisor who asked for anonymity told MNI.

While the onshore USDCNY rate could still weaken from its current 7.15 as exports soften and the effectiveness of China’s now upgraded stimulus remains uncertain, a slowdown in the Federal Reserve’s hiking cycle and PBOC support could see the yuan appreciate to 7.0 by the end of 2023, the advisor said.

POLITBURO TARGETS STABILITY

While the PBOC does not target specific levels, it manages the exchange rate to avoid sharp moves and seems to have become concerned by growing short interest and the recent speed of a depreciation from this year’s highs around 6.7 in January, MNI was told.

At its meeting, the politburo stressed the importance of maintaining the exchange rate at a “reasonable and balanced level,” the first time in two years the top policy body had set a tone for the yuan. The move was interpreted as a signal the governing body would not tolerate sharp weakness, particularly if USDCNY approaches CNY7.3. (See MNI: PBOC Seen Capping Further Sharp Yuan Weakness)

A Hong Kong forex trader told MNI authorities wanted to curb further deprecation and saw strong support around 7.20-7.25, with the currency most likely to fluctuate between CNY7.0-7.2 for the remainder of the year.

Dollar purchases from China’s physical trade sector will tend to restrain yuan strength once it reaches 7.10-7.15, said the trader, noting that rate differentials still favour the U.S. currency, with the one-year USD-offshore yuan (CNH) forward currently trading at about 2,200 pips. But any fast appreciation of the yuan below 7.10 could prompt a breach of 7 in the fourth quarter, he said.

The People’s Bank of China had already moved to boost the yuan before the politburo meeting, setting daily fixings an average 268pips a day higher than market expectations throughout July, according to China International Capital Corp. Senior bank officials indicated a preference for a firmer yuan, as the PBOC guided down rates on dollar deposits and relaxed rules on capital inflows. (See MNI BRIEF: PBOC Eases Rules On Capital Inflow To Curb Weak CNY)

The fact that the fixing kept below 7.15 from July 13 may indicate the central bank tried to slow the depreciation from the 7.2 level when yuan shorts “became dense”, the Hong Kong trader said.

YUAN BOND ISSUANCE

On July 19, the Ministry of Finance revealed plans to issue CNY12 billion in yuan-denominated offshore bonds in Hong Kong on Aug 2 – twice the amount expected. Extra issuance should drain offshore yuan liquidity and boost the currency, the trader said. The yuan strengthened 1.59% against the dollar in July, ending a run of three consecutive monthly falls and breaking key levels of 7.15 and 7.14 before closing at 7.1465 on July 31.

A Shanghai trader said the yuan would edge up in the short term thanks to improved sentiment and a weaker dollar, fluctuating close to 7.12. He pointed to net capital inflows into China’s bond market over the past two months and net CNY19 billion flows into A-shares on the day after the politburo meeting – a 2023 record.

But the sustainability of any yuan gains will depend on the strength of China’s economic stimulus and more volatility cannot be ruled out, he continued.

The China Securities Regulatory Commission has been considering detailed plans to boost capital markets, including by allowing more companies in key sectors to list, the policy advisor said, adding that rising equities will help shore up the yuan.

The PBOC will deploy its policy tool kit against any one-way bets on the yuan, the advisor said, pointing to levers including reserve requirements on foreign deposits, the risk reserve ratio for foreign currency forward contract values and issuance of offshore PBOC bonds. (See MNI: New PBOC Party Chief To Push Prudent Policy, Fx Reform)