China’s Yuan Set for Highest Close Since June on Xi, Biden Call

(Bloomberg) -- China’s yuan is headed for its strongest close in nearly three months, as a call between President Xi Jinping and his U.S. counterpart raised hopes of improved relations between the two nations.

The Chinese currency rose as much as 0.3% to 6.4375 per dollar, set for the highest closing level since June 16. Plans to allow investments for private wealth between Hong Kong and mega-cities in China’s southern region from next month also boosted the yuan.

The rally could push the yuan out of the narrow 1.3% band it has been wedged in since mid-June. The Chinese currency has remained resilient, despite a resurgence in Covid cases and Beijing’s crackdown on the country’s biggest technology companies, thanks to the authorities’ cautious approach in policy easing and capital inflows into onshore markets. 

“The talk should help improve risk sentiment in the short-term,” said Zhou Hao, an economist at Commerzbank AG. In the near term, “whether the gains in the yuan could continue will mainly depend on moves in the dollar.”

Xi said during the discussions that China-U.S. ties should get back on the right track, according to Chinese state media. The call was the second between the leaders and comes as the relationship is becoming increasingly adversarial. The conversation was initiated by U.S. President Joe Biden after meetings involving his cabinet officials and Chinese counterparts over the past months remained unfruitful. 

The offshore yuan was up 0.3% to 6.4311 per dollar after rising as much as 0.4% earlier. Some big Chinese banks bought the dollar after the yuan jumped amid headlines on the call, which helped to ease the rally, according to traders. They asked not to be named as they aren’t authorized to talk to the media. 

Other emerging Asian currencies were also swept higher by the news. The Malaysian ringgit led the advance with a 0.4% gain. The South Korean won and the Indonesian rupiah pared losses.

The yuan has barely budged since the start of June, after jumping 1.5% in the second quarter amid a drop in the dollar. The onshore yuan’s one-month implied volatility slid for a fourth day to the lowest level in more than two years, suggesting market expectations for the currency to remain steady. 

The calmness in China’s foreign-exchange market, however, could end as the yuan will weaken on the central bank’s monetary easing, according to Claudio Piron, co-head of Asia foreign-exchange and rates strategy at Bank of America in Singapore. The currency will drop to 6.60 by year-end, a level unseen since late 2020, he added.

“Signs of willingness to nudge bilateral conversations onto a more serious path could be a net positive for yuan and regional currencies,” said Yanxi Tan, foreign exchange strategist at Malayan Banking Bhd. in Singapore. But the room for any further advance “could be constrained without more discernible translation to policy changes.”

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With assistance from Bloomberg