Here's What Yuan Watchers Make of Friday's Fixing, Xi Remarks

(Bloomberg) -- First came a daily fixing by the central bank that was stronger than traders and analysts expected -- and identical down to the fourth decimal place compared to a day earlier.

Then came a pledge from none other than Chinese President Xi Jinping that his country won’t engage in currency depreciation that harms other countries. He added the yuan will be kept at a “reasonable, equilibrium level,” and the market will play a bigger role in setting the exchange rate. These comments are similar to rhetoric China has used to describe its currency policy before.

Read more about the yuan’s eventful morning here

The currency issue matters because yuan depreciation has been a concern of the U.S. in trade negotiations involving the two nations. The yuan has come up in those talks, raising expectations the matter will be addressed in a final agreement.

These developments were enough to send the yuan climbing from a two-month low. Most yuan watchers Bloomberg spoke to weren’t convinced that today marks a significant change in Beijing’s currency policies. They do, however, broadly agree the yuan is set to strengthen in the near term.

The yuan rose 0.14 percent to 6.7353 a dollar as of 4:51 p.m. in Shanghai.

Here’s what economists and strategists had to say about the yuan’s interesting morning:

Oversea-Chinese Banking Corp. (Tommy Xie, economist)

• Xi’s remarks weren’t surprising although the fixing was, but it’s too early to judge if this is the start of a policy shift
• The yuan may rise to 6.68 per dollar in the coming one to two months
• The currency is supported by the central bank’s “less loose” monetary policy, signs of an economy recovery and foreign inflows into the bond market

Commerzbank AG (Hao Zhou, senior emerging markets economist)

• This might have been a “fat finger" where someone forgot to update the fixing, but assuming it was intended, one fixing is still not enough to see this as a reflection of policy
• With the central bank maintaining a neutral outlook for such a long time, it’s a mystery why they decided to show bias today

Mizuho Bank (Ken Cheung, senior Asian foreign exchange strategist)

• Xi’s phrase heightened expectations that China and the U.S. will include yuan stability in the final trade deal
• The fixing was a stronger signal but investors shouldn’t read into the numbers too much

Australia and New Zealand Banking Group (Khoon Goh, head of Asia research)

• The fixing might be a signal that policy makers don’t want the yuan to be too weak, but we can’t read too much into one day’s fixing
• This will help other Asian currencies after the past few days of pressure

Malayan Banking Berhad (Fiona Lim, senior currency analyst)

• Xi’s comments might remind investors that the trade deal could include an agreement not to devalue the yuan competitively and that a stronger currency is more desirable
• The offshore yuan could rise to 6.68 per dollar by May, when the trade deal is expected

Scotiabank (Qi Gao, currency strategist)

• The signal from today’s fixing is a move to stabilize the market, which has been more volatile
• 6.75 per dollar may be the near-term bottom for the yuan

China Construction Bank (Stephen Chiu, currency and rates strategist)

• China’s less dependent on exports now so it doesn’t make sense to weaken the currency
• The yuan will probably trade near 6.7 per dollar in the near term before the trade deal is done
• It could strengthen toward 6.6 per dollar after the deal is announced but then fall afterward

--With assistance from Qizi Sun and Ran Li.

To contact the reporters on this story: Livia Yap in Singapore at lyap14@bloomberg.net;Claire Che in Beijing at yche16@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann, Ron Harui

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