The outlook for the Chinese yuan (CNY) has seen significant developments recently, particularly following active intervention from state-owned banks. Analysts report that these banks are purchasing U.S. dollars in the onshore market to temper the yuan's ascent, which has recently peaked at a 14-month high. This tactic is aimed at enhancing dollar liquidity and making it costlier for investors to maintain long positions in the yuan.
In terms of broader forecasts, several global investment firms are projecting that the CNY could strengthen beyond the crucial 7-yuan-per-dollar mark by 2026. This anticipated appreciation is attributed to decreasing yield differentials between China and the United States, along with expected improvements in trade relations. Despite current economic challenges, the People's Bank of China (PBOC) is taking steps to bolster the international status of the yuan by establishing robust daily reference rates and managing market volatility through interventions by state banks.
Recent monetary policy signals indicate that the PBOC is likely to focus on boosting domestic demand and guiding market expectations to avoid any sharp depreciation of the yuan. Potential interest rate cuts and reductions in the reserve requirement ratio are on the table for the upcoming year, aiming to provide more liquidity into the economy and support growth.
Market data reflects varying performance across key currency pairs. The CNY to USD has risen to 90-day highs around 0.1417, registering a marginal increase of 0.7% above its three-month average of 0.1407 and trading within a stable range. Conversely, the CNY to EUR and CNY to GBP are hovering near 30-day lows, emphasizing a period of stability with limited deviations from recent averages. Meanwhile, the CNY to JPY is performing better, showing a significant rise of 2.8% above its three-month average.
Overall, despite the challenges posed by a sluggish post-pandemic recovery and volatility in the real estate sector, the fundamentals suggest that the yuan may have the potential to appreciate in the near future, influenced by both policy measures and market dynamics.
