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Yuan rises to new 2-1/2-year high, market expects strength to sustain

SHANGHAI, Dec 4 (Reuters)The yuan edged up to a fresh 2 1/2-year high against an easing dollar on Friday, despite fresh signs of tension between the world’s two largest economies.

Traders said the currency market didn’t immediately respond to the Trump administration’s decision to add China’s top chipmaker, SMIC 0981.HK, and oil giant CNOOC to a blacklist of alleged Chinese military companies, but investors would continue to closely monitor the developments in Sino-U.S. relations before President-elect Joe Biden takes office.

Before the market opened, the People’s Bank of China (PBOC) set the midpoint rate CNY=PBOC at a two-week high of 6.5507 per dollar, firmer than the previous fix of 6.5592.

The onshore spot yuan CNY=CFXS opened at 6.5430 per dollar and rose to a high of 6.5391, the strongest level since June 26, 2018. By midday, it was changing hands at 6.5393, 25 pips firmer than the previous late session close.

If the yuan retains all the gains at the late night close, it would have strengthened 0.6% to the dollar for the week and brought the year-to-date gain to 6.5%.

Meanwhile, the dollar index =USD has fallen 6% this year, contributing much to the yuan strength. A latest Reuters poll showed that the dollar’s weakening was likely to last at least another six months as investors continue to shift to risky assets and higher returns.

Traders and investors widely believe the yuan could rise further through the remainder of the year and into 2021. Several currency traders said many exporters who were hoarding large amounts of foreign currencies to avoid exchange losses against the backdrop of recent yuan rallies had to start converting the greenbacks to the local units to make various payments towards the year-end, and such dollar-to-yuan conversion could lift the yuan higher.

Analysts at Citigroup expect the level of exporters’ FX settlements to return to historical averages, while better coronavirus containment and resilient trade would maintain the yuan’s continuing appreciation trend into next year.

But they also pointed out that part of the market uncertainty could be that the PBOC starts to implement policies to stabilize the yuan exchange rate amid sharp rallies.

Other economists believe the yield advantage would sustain the yuan strength.

“Coupled with rising global risk appetite and unusually attractive yields relative to other major markets, this is an environment conducive for further currency appreciation,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note, expecting the yuan to end 2021 at 6.20 per dollar.

The global dollar index =USD fell to 90.692 at midday, when the offshore yuan CNH=D3 was trading at 6.5301 per dollar.

The yuan market at 4:02AM GMT:

ONSHORE SPOT:

Item

Current

Previous

Change

PBOC midpoint CNY=SAEC

6.5507

6.5592

0.13%

Spot yuan CNY=CFXS

6.5393

6.5418

0.04%

Divergence from midpoint*

-0.17%

Spot change YTD

6.48%

Spot change since 2005 revaluation

26.57%

Key indexes:

Item

Current

Previous

Change

Thomson Reuters/HKEX CNH index

95.19

95.3

-0.1

Dollar index

90.692

90.693

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= *

6.5301

0.14%

Offshore non-deliverable forwards CNY1YNDFOR= **

6.7052

-2.30%

*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 Christopher Cushing and Gerry Doyle)

(([email protected]; +86 21 2083 0100; Reuters Messaging: [email protected]))

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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