Forex Comment Feb 04

Yuan remains strong but risks remain 

The Chinese currency is expected to perform well against the dollar in 2021 but may taper off as the year goes on as America’s economy gets back on its feet as fiscal stimulus take effect 

Yuan remains strong but risks remain
Around the Spring Festival, the yuan exchange rate is expected to show more two-way fluctuations.

(ATF) The yuan was set at 6.4669 versus the dollar on Wednesday, an increase of 67 basis points from the previous trading day, according to onshore data from the China Foreign Exchange Trading Center.

On January 4, the yuan was reported at 6.5408, while on January 5, it increased by 648 basis points from the previous trading day, breaking the 6.5 mark to report at 6.476. 

The rate has fluctuating between 6.4 to 6.49. According to the Securities Daily, over the 22 trading days from January 5 to February 3, it weakened to 6.4883 (on January 19) and strengthened to 6.4604 (January 6).

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The offshore rate was set at 6.4646, and the onshore rate at 6.4587, 10 bps higher than the previous close. 

Wang Youxin, a researcher at the PBOC Research Institute, said in an interview with Securities Daily that the yuan will strengthen this year. Its rise above 6.5 was the result of domestic and foreign economic recovery and monetary policy. Trends and differentiation in return on assets have not made a huge impact.

However, Wang also suggested that later this year the market situation will see change, with the unilateral appreciation of the yuan exchange rate expected to weaken and the dynamic trend of two-way fluctuations going to be more present. 

From an internal point of view, the Chinese economy has gradually recovered to a potential growth level. From an external perspective, the US epidemic prevention and control and economic recovery will gradually improve, the market has heated up discussions on the normalisation of the Federal Reserve's monetary policy, and the US dollar index has gradually bottomed out and rebounded. 

UPWARD MOMENTUM

It’s expected that, around the Spring Festival, the yuan exchange rate will show more two-way fluctuations, and the short-term upward momentum will be insufficient.

Looking at the whole year, a Guorong Securities Research Report believes that the yuan will still appreciate against the dollar in 2021, but the driving factors behind the pressure are declining. It expects the currency’s appreciation to slow – and may even usher shocks in the second half.

"A more resilient and more mature forex market has gradually formed. The future foreign exchange market will further consolidate and present the characteristics of overall balance and two-way fluctuations," Deputy Director of the State Administration of Foreign Exchange and spokesperson Wang Chunying said.

“From the perspective of the international environment, the global economy is expected to recover steadily this year but there are still many factors of instability and uncertainty.

EPIDEMIC IMPACT

“The derivative risks caused by the impact of the epidemic cannot be ignored. The turmoil in the international financial market may still exist and may increase the volatility of China's foreign exchange market,” he added. 

“Under such circumstances, the foreign exchange bureau will adhere to ‘bottom line thinking’, strengthen the two-way monitoring and risk assessment of cross-border capital flows and foreign exchange markets, improve and perfect foreign exchange management systems and mechanisms that are compatible with higher levels of openness, and effectively maintain international revenue.” 

Balance of payments and smooth operation of the foreign exchange market are China’s priority, he said.

Also on ATF:

Yuan Dollar Exchange rate Central parity Offshore