Chinese yuan rises to 9-month high after US Fed holds rates steady

Both onshore and offshore yuan were heading for their highest levels in nine months on Thursday after comments by the US Federal Reserve suggested concerns about the low level of inflation in the United States, reducing expectations for the likelihood of a December interest rate increase.

Sentiment in the yuan has also been turning less bearish on recent robust China economic data and a reversal of the dollar rally amid collapsing confidence in the Trump administration.

On Wednesday, the Fed kept interest rates unchanged and signalled its balance sheet reduction timing in September as expected. But the dollar dropped against major currencies because of the softer inflation language following four consecutive misses on US CPI.

The People’s Bank of China raised the daily yuan reference rate by 0.3 per cent to 6.7307 per dollar earlier in the day. In response the onshore yuan rose 0.4 per cent to 6.7255 per dollar and offshore yuan was 0.2 per cent higher at 6.7259. Other currencies in the region also gained, with New Zealand’s kiwi surging.

“The onshore yuan is catching up with overnight offshore yuan gains as expectations ease for a US rate hike this year,” said Jimmy Zhu, chief strategist at Fullerton Markets. “China’s domestic demand remains solid as reflected by rising commodity prices, so the yuan may approach 6.70 in the coming month or so.”

China’s better-than-expected second quarter GDP data was increasing market sentiment towards growth. Net foreign exchange outflows remained stable at US$20 billion in June compared to US$21 billion in May, Goldman Sachs said in research note.

Macquarie said in a research note that it remained positive on the yuan in the long term and that most investors currently no longer consider the currency as a major risk.

“While the top task for the PBOC in 2016 was to fight capital outflows, in 2017 [it] is to fight the depreciation expectation. Once the expectation gets reversed, the yuan could return to the self-fulfilled circle between a stronger currency and capital inflows,” Macquarie said.

A meeting of China’s top Politburo on Monday pledged to stabilise the property market and foreign and private investment.

Analysts believe the emphasis on stability implies that the central bank will maintain its tight capital controls, while aiming to quash bearish yuan investors despite recent official commentary about improving yuan market-based formation mechanisms.

“China will maintain its current policy stance before the 19th Party Congress in the fourth quarter,” Mizuho Bank said in a note.

(SOUTH CHINA MORNING POST)