Yuan Heads for Strongest in a Month, Shrugging Off China Easing

(Bloomberg) -- China’s yuan headed for its strongest level against the dollar in a month, unperturbed by the central bank’s monetary easing as the country’s economy slows.

The Chinese currency climbed as much as 0.4 percent, the most since Dec. 4, to 6.8436 per dollar, taking its advance since mid-December to almost 1 percent. The greenback, meanwhile, is on the decline against most currencies, falling to a more than two-month low Monday on signs the Federal Reserve may pause interest-rate increases.

Yuan Heads for Strongest in a Month, Shrugging Off China Easing

“Market sentiment has improved,” said Gao Qi, a strategist at Scotiabank. “The reserve requirement ratio cut has raised hope that the economy will get better, and investors expect the yuan to remain steady as China and the U.S. hold trade talks in Beijing this week.”

Officials from the two countries are meeting for the first time since presidents Xi Jinping and Donald Trump agreed in early December to a 90-day truce in the trade dispute. China’s Vice Premier Liu He unexpectedly attended the first day of the negotiations.

The People’s Bank of China said Friday it would cut the amount of cash lenders must hold as reserves. The goal is to release more liquidity and offset a funding squeeze ahead of the Spring Festival holiday, which falls early next month. The yuan pared some gains after the announcement, but still finished the day up 0.03 percent.

The currency could strengthen to 6.7 or 6.8 per dollar in the next two months, Singapore-based Gao said, adding that he was optimistic the U.S. and China will make progress toward a trade deal in that time.

Fed Chairman Jerome Powell said Friday that policy is flexible and officials are “listening carefully” to financial markets. The gap between the yield on China’s 10-year government bonds and their U.S. equivalents doubled over the past two months, making yuan-denominated assets more attractive.

“With the dollar softening following Powell’s speech and U.S. 10-year bond yields well off their highs, this has helped the yuan shrug off the RRR cut and strengthen,” said Khoon Goh, head of research at Australia & New Zealand Banking Group Ltd. in Singapore. “I see scope for further yuan appreciation” as exporters change foreign-currency holdings back into the Chinese currency before the Spring Festival.

Data on Monday showed China’s foreign currency holdings rose for a second month in December as the yuan strengthened, offsetting concerns about capital outflows. The offshore yuan also strengthened Monday, advancing as much as 0.30 percent to its highest intraday level since Dec. 4.

China’s stock market wasn’t quite so enthused -- the Shanghai Composite Index mustered a 0.7 percent gain, with banks’ mainland shares slipping. The yuan pared its gain to 0.27 percent as of 5:53 p.m. local time, while the offshore-traded rate was up 0.17 percent.

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