Yuan retreats after touching 19-month high, investors wary of PBOC

Credit: REUTERS/DADO RUVIC

The yuan rose to a 19-month high versus the dollar before giving back all its gains on Tuesday, as some investors were worried about chasing new highs after the currency's recent strength.

SHANGHAI, Oct 20 (Reuters) - The yuan rose to a 19-month high versus the dollar before giving back all its gains on Tuesday, as some investors were worried about chasing new highs after the currency's recent strength.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at a fresh 18-month high of 6.693 per dollar, 80 pips firmer than the previous fix of 6.701.

The official guidance, set firmer than the key 6.7 per dollar level for the first time since April 2019, fuelled speculation whether the central bank would allow further strength in the yuan.

The PBOC cancelled foreign exchange forward reserve requirements earlier this month after the spot price rose past 6.7, with markets widely interpreting it as a sign that the authorities might start to feel uncomfortable with rapid rises in the Chinese currency.

"Having breached the key level of 6.70, the PBOC's FX policy has been gaining more market attention," said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.

"At this stage, the PBOC appears to reserve some FX policy tools before the U.S. elections, which could pose the RMB appreciation risk," he said, but adding he maintained a cautious view on adding long yuan positions for now.

Markets expect that a victory by Democrat Joe Biden will trigger more inflows into yuan assets.

The onshore spot yuan CNY=CFXS opened at 6.6800 per dollar, the strongest since March 21, 2019, and was changing hands at 6.6854 at midday, 41 pips weaker than the previous late session close.

Its offshore counterpart CNH=D3 also followed the strengthening trend, climbing to a high of 6.6671, the strongest since July 11, 2018. It traded at 6.6756 per dollar by midday.

Separately, China kept its benchmark lending rate for corporate and household loans steady for the sixth straight month at its October fixing on Tuesday, encouraged by a robust recovery from the coronavirus shock.

Many economists and analysts expect the rates to stay unchanged through the rest of the year.

"We think the next move in the LPR will likely be an increase," Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note.

"But the PBOC will probably wait until early next year and room to push up rates will be limited by a strengthening renminbi and the withdrawal of fiscal support."

The yuan market at 0400 GMT:

ONSHORE SPOT:

Item

Current

Previous

Change

PBOC midpoint CNY=SAEC

6.693

6.701

0.12%

Spot yuan CNY=CFXS

6.6854

6.6813

-0.06%

Divergence from midpoint*

-0.11%

Spot change YTD

4.16%

Spot change since 2005 revaluation

23.80%

Key indexes:

Item

Current

Previous

Change

Thomson Reuters/HKEX CNH index

95.41

95.25

0.2

Dollar index

93.398

93.428

0.0

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument

Current

Difference from onshore

Offshore spot yuan CNH= *

6.6756

0.15%

Offshore non-deliverable forwards CNY1YNDFOR= **

6.8456

-2.23%

*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC.

(Reporting by Winni Zhou and Andrew Galbraith; Editing by Jacqueline Wong)

((winni.zhou@thomsonreuters.com; +86 21 2083 0100; Reuters Messaging: winni.zhou.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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