Yuan vaults against dollar on strong trade data

Reuters

Hong Kong

China’s yuan jumped to a record high against the dollar yesterday lifting some Asian currencies in its wake after the central bank relaxed its grip on the currency following strong trade data, suggesting a noticeable shift in policy.

The People’s Bank of China appears to have flagged a new round of appreciation for its tightly-managed currency at the year-end after it aggressively fixed the daily midpoint at a record high for a second consecutive day.

The yuan, also known as the renminbi, is allowed to trade on the mainland within a range of 1% on each side of the fixing which has repeatedly hit fresh highs in past weeks.

Underlining market optimism about the upward trend of the Chinese currency, the spot market has also become disconnected to the daily fixing, consistently trading at the stronger end of the range. The continued gains in the yuan has confounded bank models and triggered a washout of long dollar bets in the spot market.

“Authorities appear to be comfortable with the yuan’s rise and we expect a moderate pace of gains in the near term,” said Sacha Tihanyi, senior currency strategist at Scotia Bank in Hong Kong who expects the yuan to rise to 6.07 per dollar by the end of March and to 6.01 by end 2014.

“With stronger downside fixings on days like today, it is suggestive that policymakers may be allowing already the degree of flexibility that was hinted at in recent statements,” he said.

In opening trades yesterday, the yuan barrelled to a record of 6.0715 per dollar before retreating, compared with 6.0817 at the previous close after the People’s Bank of China set the daily fixing at 6.1130 - its highest since a 2005 revaluation.

The sharp gains for yuan come after it spent November crawling in a tiny band, despite volatile fixings as state-run banks, likely acting on behalf of the central bank, capped moves. The Australian dollar, which has a strong correlation to the yuan due to Australia’s large trade in commodities with China, briefly perked higher after the strong fixing.

Heavy dollar purchases by Beijing until last Thursday in its currency markets comes at a time when growth has rebounded and investors have regained confidence in the economy’s outlook after an ambitious reform roadmap released last month.

In contrast with the relative calm in the onshore currency markets, the Chinese yuan traded in Hong Kong has outperformed its counterpart onshore and Chinese stocks listed offshore are seeing heavy demand from global money managers.

But as more data has became available, the authorities have begun to change their stance towards the yuan by asking state-run banks to loosen their grip on the market and by fixing the daily midpoint higher.