China’s yuan strengthened to a seven-month high against the US currency on Monday, boosted by a stronger Japanese yen and investors rushing to unwind their emerging market carry trades.
Onshore yuan rallied to a high of 7.1150 per dollar in morning trades, the strongest level since January 2, and advanced 0.5 per cent to 7.1365 by noon local time, compared with the previous close on Friday. Its offshore counterpart followed the trend and reached as high as 7.1123 per dollar.
The sudden appreciation in funding currencies, particularly yen and yuan, dented carry trades, after weak US labour data last week stoked recession worries and fuelled bets among traders on deeper interest-rate cuts by the Federal Reserve’s open-market committee (FOMC) later this year.
“The US data amplified the post-FOMC bond rally and generated a more classic risk on-risk off split: higher beta currencies and popular longs underperformed further, while popular funders rebounded, some sharply, including against the dollar,” analysts at Barclays said in a note. The yuan also gained some support from a hawkish Bank of Japan interest-rate hike last week.
Before the market opening, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2 per cent band, at stronger than expected 7.1345 per dollar. The fixings have been set at firmer-than-expected levels for well over a year, which reflects Beijing’s desire to keep its currency stable, some traders said.
Ken Cheung, director of FX strategy at Mizuho Securities, does not expect much upside for the yuan from the current level due largely to weak domestic fundamentals.
“The market is carefully gauging whether and when Chinese exporters will start offloading their huge amounts of dollar receipts,” said a trader at a Chinese bank.
Chinese exporters have been unwilling to settle their FX receipts and have been piling them in dollar deposits in the past few years, encouraged by higher US yields and wide gap with Chinese onshore rates. Traders said once exporters start such dollar-to-yuan conversion, it will give the Chinese currency a strong boost.
The yuan is still 0.5 per cent weaker than the dollar since the start of the year. It has been under pressure since early 2023 as domestic woes around a moribund property sector, anaemic consumption and falling bond yields drive capital flows out of yuan, while foreign investors stay away from its struggling stock market.
