Yuan hits highest level in three years amid PBOC easing bets and risky buying

(Bloomberg) – The Chinese yuan hit its highest level since May 2018, as the country’s growth will remain strong thanks to the monetary stimulus and the new variant of Covid will not hamper the global recovery.

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The onshore yuan gained as much as 0.2% to 6.3515 per dollar, surpassing an annual high reached in May. The moves came as the dollar is set to fall for a second week, amid optimism that omicron will have only a limited impact on the global economy. Traders also became more confident that China’s growth would be strong after the central bank announced broad monetary easing this week.

The yuan has gained 2.7% this year, making it the best performer among major currencies, thanks to inflows of funds driven by robust exports and foreign purchases of onshore bonds. Confidence was further boosted this week when the Communist Party’s Politburo meeting ended with a signal for further easing and a commitment to stabilize the economy in 2022. The bank’s lack of aggressive action Central to block the advance also fueled bets that appreciation would hold.

“It’s total risk,” said Alvin Tan, head of foreign exchange strategy for Asia at RBC Capital Markets. “Carrying the yuan is very attractive. And it’s fair to say that the market remains impressed with the central bank’s tolerance for the currency’s continued strength. “

The yuan gained 0.2% to 6.3544 by 1:30 p.m. in Shanghai. Chinese bank owner’s counters stepped up dollar sales after the yuan broke this year’s high, a move that triggered the currency to appreciate even faster, according to three traders. They asked not to be named as they are not allowed to speak publicly about the forex market.

The outlook for the yuan hinges on the People’s Bank of China tolerance for its strength. So far, the recent appreciation has only been greeted with slightly weaker-than-expected bindings and a gentle reminder not to make one-sided bets. Policymakers can issue verbal warnings to contain the rapid advance, but will not take more aggressive action such as asking lenders to hold more dollars, according to Ken Cheung, chief foreign exchange strategist for Asia at Mizuho Bank Ltd.

The PBOC this week announced a reduction in the amount of cash lenders must set aside as reserves, suggesting that Beijing is prioritizing growth over cracking down on the sprawling real estate sector and tech industry. Easing monetary policy can act as a double-edged sword for the exchange rate over the medium term. While a plentiful supply of liquidity benefits the yuan by promoting growth, it could also hurt foreign demand for the currency as it lowers China’s rate premium against the rest of the world.

“Going forward, foreign capital inflows and the current account surplus could remain large, as the emergence of the omicron could make countries more cautious about reopening borders on a large scale,” Carie said. Li, Global Market Strategist at DBS Bank Ltd. “While there is no sign of the increasing bets on a one-way appreciation of the yuan, with the currency showing a two-way movement in a range, moderate and gradual strength does not necessarily raise concern for the PBOC.

The Thai baht led the gains among emerging Asian currencies on Wednesday, advancing 0.6%, followed by a 0.3% rise in the Malaysian ringgit.

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