Among the world’s ten most actively traded currencies, it was the Chinese yuan that was leading the pack approaching the end of the Asian business week.
As of 7:30pm in Singapore (GMT+8), the yuan’s marginal 0.2% appreciation for the week to 6.331 per US dollar was enough to seal top spot, with the dollar itself being best of the rest, thereby continuing its recovery from long-term lows.
The yuan required only two trading days to claim the week’s crown – Chinese markets were closed on Monday, Tuesday and Wednesday for Chinese New Year celebrations – and has now gained nearly 10% over the dollar since the beginning of 2017.
Analysts believe that China, which carefully manages the yuan, is allowing its currency to rise in order to avoid being labelled a currency manipulator.
“Part of [the yuan’s rise] is likely a response to President Trump and the need to avoid being labelled a currency manipulator,” said Nomura’s head of G10 FX strategy Bilal Hafeez on Friday.
On his campaign trail, the now-US President Donald Trump frequently stated that he would officially label China a currency manipulator should he be elected, but he has so far refrained from doing so during his time in office in order to win political support from Beijing – support such as that needed during 2017’s period of military provocation by North Korea.
While market forces do play some part in China’s “managed float” currency system, China restricts the yuan’s movements against the dollar to within 2% of a central rate, set daily by the People’s Bank of China.
SEB: Dollar to Buy Only 6.1 Yuan at Year-End
A recent forecast from Swedish bank SEB suggests further yuan appreciation in 2018, with a year-end rate likely to fall around 6.1 per dollar, according to the bank’s analysts.
Among reasons for the forecast, SEB’s head of Asia strategy, Sean Yokota, cited monetary policy, as well as an increase in the yuan’s status and relevance as a world reserve currency.
Speaking to Forbes this week, Yokota said that the People’s Bank of China would “hike [interest rates] starting in the second half of 2018 to facilitate de-risking and deleveraging” – policy decisions that would curb Chinese economic growth but would bolster the yuan.
Additionally, “CNY as a reserve currency will be more attractive with the loss in the dollar’s value as well as the Trump administration sending mixed signals on its preference for a strong greenback,” Yokota added.
Also with bullish forecasts for the yuan are China International Capital Corp., which is predicting a year-end USD/CNY rate of 6.18; UBS, which sees 6.2 as most likely; and ANZ, which goes with 6.25.
All banks are not on the same page, however. In its latest report on China, released on Thursday, ABN Amro admitted that “Chinese policy makers appear ready to tolerate a strong yuan” but simultaneously expressed a belief that the Chinese economy would cool in 2018 and the dollar would recover, albeit modestly.
“Taken all together, we foresee some weakening for the Chinese yuan versus the US dollar,” concludes ABN’s Arjen van Dijkhuizen.
ABN is forecasting a year-end USD/CNY rate of 6.5.