Forex Comment Feb 02

Yuan expected to climb to 6.51 in 2021

China's currency is tipped to settle around 6.51, according to Netease analysts, who expect the Biden Administration to pass a stimulus package at some point, as well as bring the epidemic under greater control; that should boost the economy and the dollar

Yuan expected to climb to 6.51 in 2021
A woman is taken to hospital in New York for a Covid-19 check. The US economy is still suffering badly from the pandemic and that has dragged down the dollar, while inflows of foreign cash have boosted Chinese bonds and its economy. So, the yuan is expected to rise further, but how long that persists is hard to guess. File photo: Reuters. 

(ATF) On February 2, the exchange rate for the yuan "opened flat" and fell slightly. Later in the day, it had fallen to 6.4616 to the US dollar. However on Monday, the offshore yuan rate rose by 261 basis points, and in the future it is expected the yuan will settle around 6.5100, according to Netease.com.

For the yuan to hit 6.51 from its current level (6.4640), it would have to rise by 460 basis points. According to data recently released by the State Administration of Foreign Exchange, in 2020 the net increase in foreign holdings of domestic bonds was slightly over US$186 billion, which is equivalent to about 1.2 trillion yuan. That data led to a central parity rate of 6.4736 yuan today.

In 2020, a large amount of foreign capital flowed into China's capital market, especially the bond market, mainly because China’s bond yields are "high" and the risks are still small, which conforms to the investment logic of "preservation and appreciation".

At present, take the yield of 10-term national bonds of major economies, for example, which country has the highest bond interest rate?

The data shows that as of now the 10-year bond yield in the United States is 1.081%, the 10-year Canadian bond yield is 0.883%, and the 10-year German bond yield is -0.514%. The 10-year treasury bond yield is 0.322%, the Chinese 10-year treasury bond yields 3.196%, and the Japanese 10-year treasury bond yields 0.053%.

Obviously, among the major economies, China’s 10-year treasury bond yields are the highest, and that has caused a large amount of overseas capital to flow into the country, thereby forcing the yuan to appreciate.

In addition, China is also one of the countries that has done well in the prevention and control of the Covid-19 epidemic, and its economy "recovered" in a short period of time. In 2020, the country's GDP growth rate was about 2.3%, while the United States' economic growth fell by about 3.5%.

US economy still rocked by Covid-19

And the US economy is still suffering from the epidemic. So, in the first half of 2021, how much the US dollar might rise is open to discussion, but a further rise of the yuan “anticipated”.

On January 28, data released by the US Department of Labor showed that the number of people receiving unemployment benefits for the first time that week was "hovering" at a high of more than 800,000. And as of today, the total number of unemployed people in the United States is roughly 18 million.

Judging from the above content, Netease believes the US dollar does not have significant grounds to appreciate. But yesterday, the US dollar index did rise sharply. According to the market trend chart, the dollar index rose by 525 basis points, or 0.58%.

And, in mid-December last year, the US dollar index began to "bottom out". In mid-January, the US dollar index began to "climb" again. Yesterday, the US dollar index not only broke resistance of the 60-day moving average, but also regained its position at 91.000.

In the near future, this continued upward trend in the US dollar index is most likely caused by the dollar's rising risk aversion sentiment. Last year, most countries around the world endured a fall in economic growth or fell into a recession. This year, central banks and finance ministries will adopt various measures to stimulate their economies.

Once the world adopts the strategy of "sweeping floods", the dollar's hedging characteristics will be further "highlighted", and that can be very detrimental to the yuan rising.

Last month, Trump left Biden with two major problems: Firstly, how to curb the epidemic, and secondly, how to stimulate the economy to return to normal. Judging from the attitude expressed by the Federal Reserve recently, the Biden administration has few stimulus options, and fiscal policy stimulus may be the only solution.

At present, many people are still waiting to see whether Biden’s $1.9 trillion economic stimulus plan will be "slimmed down". Netease was confident that this year, the United States will have a large-scale stimulus programme, and there will not be a "wave". But if it is "a few waves", the US epidemic and the economy will be difficult to reverse.

Therefore, under this kind of market expectation and with a background of the devaluation of non-US currencies, dollar is expected to appreciate. So, in the short term, it is very likely that the offshore yuan exchange rate will be around 6.5100.

Finally, judging from the one-hour chart, in recent days, the offshore RMB exchange rate has been approaching the upper edge of the rising channel many times, and it may be break through at any time.

From the one-hour chart, the offshore yuan exchange rate is brewing. Once the offshore yuan exchange rate gains support near 6.4600, it means it will rise above 6.4800 next. So, analysts believe it is absolutely no problem to expect the offshore yuan exchange rate at 6.5100 in 2021, Netease analysts say.

ALSO SEE:

China puts brakes on strongest yuan in 30 months

The digital yuan and the power of currencies

Foreign Exchange Yuan to dollar Chinese yuan US dollar pandemic impact Covid-19 Biden stimulus package vaccines