China’s Yuan Gains Versus Dollar and Peers as Optimism Prevails

(Bloomberg) -- China’s yuan rallied beyond a key level versus the greenback for the first time in seven months while outperforming Asian peers, as investor confidence gets a boost on planned trade talks with the U.S.

The onshore yuan climbed as much as 0.29% to 6.8960 per dollar on Friday, breaching 6.9 for the first time since January. The currency has risen 0.6% this week, outpacing gains in all Asian exchange rates except the Japanese yen.

Fueling the yuan’s strength are bets that a trade agreement between China and the U.S. will stay intact despite a recent escalation of tensions, as Beijing confirmed the two countries plan to hold talks soon. The Asian nation is buying “a ton of” commodities as part of the deal, President Donald Trump’s top economic adviser Larry Kudlow said this week. The dollar’s plunge to a two-year low has also strengthened the yuan against it.

“The next important level to watch is 6.85, where we will likely see resistance as traders may think the currency should fall after a quick rally and Beijing may worry it’s too strong,” said Zhou Hao, an economist at Commerzbank AG. “The yuan will likely test that level soon, as investors price in less uncertainty in terms of trade relations between China and the U.S.”

The yuan’s interest rate premium over the greenback hit the highest since 2018 last week, making an attractive carry trade of being long the Chinese currency traded offshore. The unit has strengthened more outside of China than onshore, with the spread between them the widest in nearly two months. Domestic investors are subject to more regulatory restrictions trading the yuan.

The currency’s rebound this month isn’t limited to its rate against the greenback -- the yuan has advanced for a third week versus a basket of 24 peers, the longest streak since March. That’s a reversal from July, when the yuan tumbled against its peers to the lowest level this year.

The turnaround is a catchup trade as the yuan underperformed peers amid drops in the greenback, due to the Chinese government’s tighter controls on the foreign-exchange market. Also, it suggests that investors are buying the yuan not only because of dollar weakness but also China-specific reasons, such as Beijing’s trade relations with the U.S. and the country’s economic recovery.

“With the People’s Bank of China likely unfettered about the yuan strength versus the dollar, and an escalation in trade war unlikely, we could see the yuan now set sights on 6.85 to 6.87,” said Stephen Innes, chief market strategist at Axicorp Ltd.

Meanwhile, technical indicators are flashing conflicting signals on where the yuan may go next. While the currency is overbought according to its relative strength index, it also saw a golden cross last week that may prelude further gains.

The onshore yuan strengthened 0.06% to 6.9118 as of 3:57 p.m., while the offshore rate stood at 6.9041. The offshore currency also briefly traded stronger than 6.9.

©2020 Bloomberg L.P.