MNI: Yuan To Rally On PBOC Support, Exporter Demand-Advisor

The yuan looks set to rally further thanks to U.S. dollar weakness and year-end demand for cash in China, while the PBOC will continue to shore up the currency and react to firmer tone by narrowing the differential between its stronger daily fix and the market price, policy advisors and traders told MNI.

The yuan-dollar exchange rate will fluctuate, but it is unlikely to retrace the 7.30 level last seen in early November and could strengthen as far as 7.0 should the USD index continue its journey from its 2023 107 high past its current levels just below 104 all the way to 100, said Zhao Qingming, senior fellow at China Forex Investment Research Institute, speaking after the yuan surged to a four-month high of 7.12 on Tuesday. So far this month, the currency has jumped as much as 2.27%, or 1662 pips, against the greenback – its biggest monthly appreciation since January as the USD index has fallen by 2.78%.

A larger yuan rally though remains unlikely barring an obvious improvement in China’s economic performance or market sentiment, Zhao said, noting the currency has weakened against the euro and the yen this month.

A forex analyst said the rally would not end in the short term considering the PBOC's stronger-than-expected fixings to guide the market, which indicated the central bank wants to consolidate the rally's trend. (See MNI: PBOC Faces Tough Task To Defend Yuan, Advisors Say)

Demand for yuan jumped when it strengthened below 7.20 last Friday, a commercial bank forex trader told MNI, adding the November-January period tends to see the biggest appetite for the currency from Chinese exporters seeking to sell dollars, with an appreciation of 1-1.5% on average over the last six years.

Exporters’ stock of unconverted USD is sizeable, with China International Capital Corporation reporting the gap between the country’s trade surplus and foreign exchange settlements was as much as USD261 billion in the first nine months of the year, compared with USD157 billion in 2021 and USD290 billion in 2022.

YUAN FIXING

With the yuan rallying, the spread between the People’s Bank of China’s daily fixing and market pricing is narrowing, and was just 178 pips on Wednesday, the smallest since August, according to MNI calculations. It had peaked at 1517 pips on Nov 1 and had exceeded 1,000 pips every day during October, before starting to narrow this month. (See: MNI: PBOC To Seek To Close Gap Between Yuan Fixing And Market)

The large gap between the fixing and market estimates has come as the PBOC has deployed its so-called “counter-cyclical” factor in calculating the fixing, the forex trader noted. The fixing largely stayed around 7.17-7.18 over the past two months, but the gaps with the onshore and offshore CNY and CNH rates have narrowed as the market rate has strengthened past 7.16, he said.

The counter-cyclical factor is needed less now that the yuan is strengthening on its own, an advisor said, adding that the use of the factor had succeeded in stabilising the currency since mid-September after the central bank became concerned by capital outflows and negative equity market sentiment.

For the moment, the PBOC will set the fixing in a more flexible way and more in line with the market, the advisor said, adding that additional fiscal stimulus and official policies aimed at reducing financial risk will boost the economy and the currency into 2024.

The forex analyst said market sentiment would improve should authorities bailout the property sector at an effective pace, which will determine how far the yuan rallies.