With a trade deal nearly signed and China’s economy on steadier footing, the path for China’s yuan to strengthen is now wide open.
The currency rose to a five-month high Monday, punching past 6.9 per dollar for the first time since August. It also strengthened for a fourth session versus a basket of trading partners’ currencies. The move helped bolster sentiment in stocks, with the CSI 300 Index closing at its highest level in almost two years. Shares of Chinese companies also surged in Hong Kong.
While analysts say the exchange rate is being driven by improving market sentiment as China’s economy steadies and trade tensions ease, the recent bout of strength comes at an pivotal time for U.S.-China negotiations. Chinese Vice Premier Liu He is expected to sign the long-awaited phase one agreement in Washington Wednesday.
Some now predict the currency will touch 6.8 per dollar within three months — a level not seen since May last year.
“Having a stronger currency is one way to show good will,” said Mitul Kotecha, a senior emerging-markets strategist at Toronto-Dominion Bank in Singapore. “Signs of a gradual, as opposed to rapid, slowdown in China’s economy and limited decline in China rates will provide support to the currency.”
China’s currency weakened past the key 7 per dollar level for the first time in a decade in August, when tensions between the two nations escalated. The yuan’s slide last year reignited one of Trump’s favorite criticisms of China: that Beijing weakens its currency to aid exporters.
Now, investor optimism over the economy and trade has kept the currency on the strong side of 7 for more than two weeks. With technical indicators flashing bullish signals, multiple measures of expected volatility are hovering near their lowest in about five months, signaling a reluctance among traders to hedge against swings. The yuan has gained more than 4% since September’s nadir.
The U.S. in October indicated it will consider removing China from its list of currency-manipulating nations after completing the first phase of a U.S.-China trade deal.
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Some yuan watchers are advising caution. Cliff Tan, head of global markets research for East Asia at MUFG Bank Ltd., says expectations of fiscal stimulus may be running too high. Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd., says the yuan’s strength is temporary, as it’s partly related to corporate spending and exporter conversion before the Lunar New Year.
Analysts started revising their 2020 forecasts for the yuan last month, following news that Beijing and Washington reached an agreement. Evidence that a slowdown in the world’s second-largest economy may not be as bad as feared has also helped, with recent data showing that China’s manufacturing sector continued to expand in December.
Expectations that authorities will add to policies supporting growth — while staying clear of large-scale monetary stimulus — are also boosting sentiment for the yuan.
The median forecast of analysts surveyed by Bloomberg is for the yuan to end 2020 at 6.95.
“The yuan’s outperformance since last week has reflected the improving risk sentiment, thanks to signs of the economy bottoming out,” said Tommy Xie, an economist at Oversea-Chinese Banking. “There’s some speculation that China may get a better trade deal than expected.”