SHANGHAI: China’s yuan advanced further against the dollar for the fifth trading day on Tuesday, hitting a new nearly five-month high, supported by investor optimism over the country’s reopening.
But traders said gains were capped after the Chinese currency approached the key 6.75 per dollar mark, where some corporate clients rushed to take advantage of the cheaper dollar and bought on dips.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.7611 per dollar, firmer than the previous fix of 6.8265.
In the spot market, the onshore yuan opened at 6.7650 per dollar and rose to a high of 6.7510 at one point, the strongest since Aug. 15, 2022. By midday, it was changing hands at 6.7698, 32 pips firmer than the previous late session close.
The yuan has gained about 2% against the dollar so far this year and reversed much of 2022’s annual loss, the biggest in 28 years, boosted by China’s growth prospects after Beijing reopened borders and dismantled COVID-19 curbs faster than projected.
“We expect the CNY to strengthen further from here in 1H 2023 and revise the 12-month USD/CNY target to 6.65,” analysts at Morgan Stanley said in a note.
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“The strength would be front-loaded, with the CFETS basket strengthening further in 1H, before some moderation in 2H in view of more meaningful outbound travel recovery.”
China’s yuan hits near 5-month high on reopening boost, seasonal demand
However, some traders said the yuan’s fast appreciation since the start of the year might not be sustainable, as gains were partly the result of seasonal corporate demand.
“The short-term strength might have come to an end. The pace of the gains was a bit too fast,” said a trader at a local bank.
Chinese exporters usually convert more of their FX receipts into yuan for various payments, including orders and bonus handouts, ahead of the week-long Lunar New Year holiday which starts on Jan. 21.
Separately, three state-owned financial newspapers also warned that investors should avoid Chinese currency risk and adapt to higher foreign exchange volatility this year after the yuan’s sharp gains.
Some traders said they would look to a speech by Federal Reserve Chair Jerome Powell later in the session and to US inflation data later this week, for more clues on the outlook of the Fed’s rate-hike path.
In global markets, the dollar languished near a seven-month low against other major currencies, as investors took heart that the Fed may be nearing the end of its hiking cycle.
