In both onshore and offshore markets, the Chinese yuan climbed in the past week to its highest level against the dollar since the summer of 2015, and in doing so, posted its largest quarterly gain in a decade – a gain of 3.7%.
Now worth 6.27 per dollar, the yuan’s rise is the result of inflows of investment capital into China, as well as expectations for a stronger yuan amid a looming trade war with the US, say analysts. The currency had been as strong as 6.242 per dollar on Tuesday.
Vehicles supporting the flow of capital back into China in the coming year include the Bloomberg Barclays Global Aggregate Index and the MSCI Emerging Markets Index. Bloomberg announced in early March the inclusion of yuan-denominated bonds in the BBGAI, which remains one of the most tracked bond indices in the world by fund managers and which analysts say might bring $250 billion into Chinese debt markets; and beginning in June, MSCI will include Chinese equities in its index, which might send upwards of $500 billion to China from investors in MSCI ETFs.
Also assisting the yuan over a longer term will be this week’s launch of yuan-denominated oil futures on the Shanghai Futures Exchange – the first of their kind – which take China further along the path of internationalization of its currency and promote a longer-term acceptance of it.
Expectations for a firmer yuan, which drive speculative purchases of the currency and force the price up, stem from the development in March of what many are describing as a Washington-Beijing trade war.
Further to tariffs on global steel and aluminium imports, Washington announced on March 22nd that it would impose tariffs on up to $60 billion worth of Chinese goods, aimed at tackling intellectual property theft by China and its near-$400 billion trade deficit with the Asian giant. The tariffs sparked threats of retaliation from Beijing, whose commerce ministry released a list of 128 US-manufactured products that would be targeted should Washington choose, via protectionist measures, to continue to “drag bilateral economic…relations into danger.”
Despite tough talk, in an effort to avert a full-blown trade war, it is believed by analysts that Beijing is happy to allow the yuan, over which it keeps a firm hand of control, to appreciate. A more expensive yuan makes Chinese goods more expensive and therefore less attractive to foreign buyers, and would have a material and constructive effect on the US-China deficit.
“Chinese officials [are now] more willing to tolerate upward pressure on renminbi generally, in a bid to appease the US,” said a note last week from Capital Economics.
In the short-term, the Chinese currency will likely meet some resistance between 6.24 and 6.22 per dollar, which reflect in onshore and offshore markets important Fibonacci retracement levels – the 78.6% Fibonacci – from the yuan’s January ’14 to December ’16 decline. Fibonacci levels are closely watched by short-term players in foreign exchange markets.
In February, during which several banks updated 2018 forecasts and when dollar-yuan averaged 6.32, analysts were generally bullish the yuan, with most predictions for year-end lying between 6.1 and 6.25. A notable exception came from ABN Amro, which cited expectations for a cooler Chinese economy and for a modest recovery in the US dollar as reasons for its bearish prediction of 6.5.
Against other major currencies, the yuan also strengthened last week, although exchange rates of 7.73 per euro, 8.79 per pound and 16.9 yen were roughly equal to 12-month averages. Notably, the yuan rose to a 21-month high versus the Australian dollar, against which it now trades in the mid-4.81s.