China’s yuan set for more gains against US dollar as Fed sends dovish signals
The Chinese currency is already rising against the US dollar and will receive another boost if the Federal Reserve cuts interest rates
The Chinese yuan is set to continue making gains against the US dollar over the coming months, as China’s central bank sets strong daily reference rates for the currency and traders bet on possible US interest rate cuts, analysts said.
The People’s Bank of China (PBOC) set its strongest onshore yuan daily reference rate of the year on Friday, at 7.1030 per US dollar, with the yuan’s fixing rate gaining 0.65 per cent against the dollar over the month of August.
On Monday, the central bank set the daily reference rate just below that year-high peak, at 7.1072 per US dollar.
“We see the unusual appreciation bias in the PBOC’s daily fixing as a policy push to guide the yuan gradually stronger,” Goldman Sachs analysts said in a research note on Monday.
The analysts noted that historically, China’s central bank had tended to set the rate weaker than spot when the dollar was strong and the yuan faced depreciation pressure – a pattern not seen in recent market moves.
“This pre-emptive move by the PBOC should help the yuan catch up with peers and reduce the risk of a sharp appreciation later,” the note added.
In August, the offshore yuan rose by 1.21 per cent against the dollar and was trading at 7.1279 per US dollar as of Monday noon.
Those gains came even as the yuan had a deeply negative carry, meaning that investors earned less by holding yuan compared with other currencies, according to Goldman Sachs.
But with Federal Reserve Chair Jerome Powell delivering dovish remarks in late August, signalling a possible interest rate cut in September, the carry between the dollar and lower-yielding currencies such as the yuan could soon narrow.
If that happens, the dollar’s decline could accelerate and the yuan could make further gains, analysts at Huatai Securities said in a Monday note.
Goldman Sachs expects the yuan to strengthen to 7.0 per dollar by the end of the year, with onshore and offshore rates likely converging towards the central bank’s daily fixing.
With greater stability in China’s economy and yuan assets still undervalued, the Chinese currency has “considerable room” for further appreciation, Huatai Securities said.
Gary Ng, a senior economist at Natixis, also held an optimistic outlook towards the yuan if the Fed moved ahead with a rate cut.
“Chinese exporters may also begin converting their accumulated foreign currency receipts into yuan,” he said.