Further Rally Seen for China's Yuan as It Breaks Key Level

(Bloomberg) -- China’s currency is at a five-month high, and technical indicators suggest more gains are coming.

Buying momentum is the strongest in almost a year and bearish bets had fallen to 12-month lows in the options market. A rising currency makes China’s financial markets more attractive to overseas investors -- foreign flows into the country’s debt surged in December -- which may further buttress gains.

Throw in a dovish Federal Reserve along with signs of progress in trade talks, and the sell-off of just a few months ago seems a distant memory.

Here are four charts showing why yuan strength may persist:

Further Rally Seen for China's Yuan as It Breaks Key Level

The yuan’s 14-day relative strength against the dollar is at the highest since February 2018, reflecting a rise in buying momentum. Investors are turning bullish on the Chinese currency, which has room to climb further in the long term thanks to a weaker dollar, according to Ken Peng, a Hong Kong-based investment strategist at Citigroup Inc.

Further Rally Seen for China's Yuan as It Breaks Key Level

The greenback has fallen to its weakest level since September, making dollar assets less appealing relative to those denominated in the yuan. The slide came as several Fed officials, including Chairman Jerome Powell, reinforced the message that the U.S. will likely take a break from raising rates in the coming months. Powell said Thursday the Fed will keep shrinking its balance sheet.

Further Rally Seen for China's Yuan as It Breaks Key Level

Traders have been paring bearish bets on the Chinese currency quickly and even turned slightly bullish in the options market. That had pushed the offshore yuan’s one-month risk reversal down to the lowest level since 2011 this week. Investors should long the offshore yuan against the greenback with forwards, as positive news on trade would trigger a rally in emerging-market assets, said Lu Sun, a strategist at Citigroup in Hong Kong.

Further Rally Seen for China's Yuan as It Breaks Key Level

Foreign investors boosted their holdings of Chinese debt last month by the second-most on record -- reversing November’s net selling. The $12 trillion market will see $80 billion of inflows this year, according to Morgan Stanley, with some onshore debt on track for a phased-in inclusion to the Bloomberg Barclays Global Aggregate Index in April.

The onshore yuan rose 0.14 percent to 6.7794 as of 9:37 a.m., extending Thursday’s 0.42 percent gain. The offshore rate rose 0.18 percent Friday.

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