So Much for Currency Manipulation, Yuan at 21-Month High Amid Dollar Bloodbath

So much for currency manipulation. The Chinese yuan surged against the US dollar on Thursday, forcing USD/CNY below 6.45 for the first time since December 2015. The dollar had fetched as many as 6.96 yuan in January.

The yuan has started September extremely brightly, picking up where August left off. With only five trading days of the month in the books, the yuan is already up 2.2%, exceeding August’s gain of 2.1%, which itself marked the yuan’s best monthly performance since China scrapped its fixed dollar peg in July 2005.

Amid heavy dollar selling early in the European session, it was only a matter of time before USD/CNY broke below 6.52 – a level on which the rate had rested since Monday.

In what was as clean a technical break as you might ever hope to see, USD/CNY began free-falling (in intra-day terms) the moment the market printed 6.518, a little before 8am in London.

USD/CNY’s session low of 6.447 took the yuan’s year-to-date gain against the dollar to 7.7%.

In light of the yuan’s recent performance – the currency has shown real vigour in recent months even where other Asian currencies have faltered or been directionless – many analysts are now suggesting that, curiously, the Chinese currency is being treated by investors as a safe haven.

The rationale for this stems from the fact that the Chinese government, by way of the People’s Bank of China (PBOC), keep a firm hand of control over their national currency.

Unlike the currencies of the US, Britain and Australia for example, among many others, China’s currency is not freely floating, which is to say that its value is not wholly determined by market supply and demand. While market forces do play a part in China’s ‘managed float’ system, daily changes in USD/CNY are restricted to moves of 2% above or below a central rate, or ‘fix’, which is set daily by the PBOC. The argument goes that China, therefore, offers a level of stability that is unavailable elsewhere.

Other market chatter suggests, more simply, that the Chinese government will not allow the yuan to fall ahead of next month’s 19th National Congress.

Held once every five years, the congress of the ruling Communist Party is China’s most important political event, at which significant changes are made to the country’s top leadership.

“For Beijing, maintaining stability in its economy and markets is a major priority ahead of the power shuffle, which is why the government has been working overtime to support the yuan,” says CNBC’s Sophia Yan.

Further to persistently negative dollar sentiment, which has increased in the wakes of hurricanes Harvey and Irma, other factors supporting the yuan in recent weeks have included positive surprises in Chinese economic data.

USD/CNY 1 Week Chart

On Monday, a market analyst at Macquarie Group upgraded his 2018 commodities forecasts by as much as 46% largely on the back of his team’s reassessment of China’s economic outlook.

“The biggest discernible change…has been a lifting in investor sentiment towards China, with strong June macroeconomic prints – including the third-highest ever loans data – having presented a more robust picture of [Chinese] activity for the second half of 2017,” the analyst explained.

Regardless of the reasons for its movements, the yuan’s climb this year will have done a great deal to appease the Trump administration, or perhaps to make those in Washington look slightly ridiculous.

Despite choosing in April not to label China a “currency manipulator” – a decision made to win Beijing’s support against an increasingly provocative North Korea – President Trump had been very critical of China’s management of the yuan throughout his presidential campaign, suggesting several times that China had been intentionally undervaluing its currency to gain a trade advantage over the US.

Looking ahead, a medium-term outlook for the yuan is offered by Standard Chartered’s Wang Xinjie, as reported by China Daily.

“From a medium-term perspective, the yuan will not go through a unilateral rally, and the yuan-dollar exchange rate will probably achieve two-way fluctuations [but] with improving flexibility,” said Xinjie.


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