Yuan’s Blockbuster Week Draws PBOC Attention, Appreciation Bets

(Bloomberg) -- The yuan’s relentless advance against the dollar is raising expectations that it could hit levels last seen before its shock devaluation in 2015.

The near 1% rally this week brought it closer to the most bullish calls on Wall Street, and drew a reminder from the People’s Bank of China that authorities are closely watching the market. Strategists at Citic Securities Co. and Scotiabank expect the currency to strengthen to 6.2 against the dollar in onshore markets from the current 6.3840.

With China’s economy rebounding from the pandemic and foreign funds piling into its equity and bond markets, the yuan surged past crucial levels that have held for the past three years. The advance is creating a momentum of its own, drawing in investors looking for an attractive yield play in a world of low rates. So far, the central bank has refrained from acting to slow yuan appreciation, though a statement issued late Thursday warned against one-way bets and predictions.

“The central bank is trying to downplay the market’s over-emphasis on the renminbi after two separate PBOC official speeches last week caught lots of attention,” said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. in Singapore. Still, “the embedded structural dollar weakness may remain supportive of renminbi in the medium term,” allowing to rise toward 6.25 by year end, he said.

While the daily dollar-yuan reference rate by the PBOC this week implied that it is comfortable with the recent appreciation, its latest statement suggested that policy makers are growing concerned about the increased focus on yuan strength. Traders will be watching Friday’s fixing at 9:15 a.m. Beijing time for further signaling.

The foreign exchange market is in balance currently, and the rate could go either way in the future as many market elements and policies could affect it, the central bank said. It can’t be used as a tool to spur exports or offset higher commodity costs, authorities emphasized, adding that “enterprises and financial institutions should adapt to a two-way fluctuation of the exchange rate.”

“Despite the neutral tone, the timing of the statement clearly indicates that the central bank is trying to break the psyche of appreciation,” said Chang Shu, Chief Asia Economist for Bloomberg Economics.

Fixing Signals

The PBOC has been neutral in setting its daily reference rate this week, tracking moves in the market rather than using it to limit appreciation. In the past, authorities have used the fixing to signal when the currency is seen as moving in one direction too quickly.

“With China’s strong exports, lower real rates in the U.S. and a dovish stance from the Federal Reserve overall, we believe that the renminbi still has room to appreciate,” said Ming Ming, head of fixed-income research at Citic, China’s largest brokerage.

Chinese exports jumped more than 32% in April in dollar terms, beating expectations as global stimulus fueled demand. The rest of the economy, from industrial output to retails sales, have also shown strong growth.

Best Performer

The rally has turned the yuan into Asia’s best-performing currency this year. It marched past 6.4 against the dollar in offshore markets on Tuesday, crossed the same barrier in Chinese markets on Wednesday, and then hit a five-year high against a basket of trading partners a day later.

“Even though the Fed has started to talk about tapering or start tapering, its balance sheet will continue rising -- the dollar will keep weakening as markets get used to this idea,” said Gao Qi, a currency strategist at Scotiabank in Singapore. That will allow the yuan to rise to 6.2 by year end, he said.

In the short-term, Gao has lowered his target for a short dollar-offshore yuan trade to 6.3. “An orderly appreciation in the yuan is acceptable to China’s authorities, but one-way speculation will continue not to be allowed by the PBOC as before,” he said.

The 6.2 target is also shared by other banks including Westpac Banking Corp.

Xia Le, chief Asia economist at BBVA Hong Kong, said that while the yuan may climb toward 6.3 per dollar by year-end, the central bank won’t allow a “rapid rally to run forever.”

“Trade tensions between China and the U.S. haven’t been resolved and it will hurt exports,” he said. “When the supportive factors such as strong exports falter in the future, China will then see quick capital outflows and rapid yuan depreciation.”

©2021 Bloomberg L.P.