Onshore Yuan Surges Beyond Key Level Last Seen in May 2016

Sep 07, 2017 6:55 am ET

(Bloomberg) -- China’s yuan surged in late trade, strengthening beyond the 6.5 per dollar level for the first time in 16 months.

The Chinese currency traded in Shanghai rose as much as 0.55 percent to 6.4908 per dollar, outpacing a 0.4 percent drop in the Bloomberg Dollar Spot Index. It pared gains to trade at 6.4921 as of 6:17 p.m. local time. The offshore yuan advanced 0.68 percent before trading up 0.64% at 6.4989.

China’s exchange rates at home and overseas have registered Asia-beating gains of more than 3 percent in the past month amid speculation policy makers will buoy the currency in the run-up to a key Communist Party meeting on Oct. 18. That premise of government support is also positioning the yuan as a recipient of haven flows from investors rattled by escalating tensions between the U.S. and North Korea.

“The rally will continue, with traders trying to push the yuan to 6.45 per dollar, as the fact that the onshore currency hit 6.5 can be seen as a signal that the PBOC is allowing more appreciation," said Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd. "Investors should be more cautious as the PBOC may try to slow the advance as the yuan has gained too much too quickly, and this will start to hurt exports.”

The yuan’s turnaround in 2017 -- after a three-year drop -- has come amid a combination of broad dollar weakness, capital controls and a rebound in economic momentum. China’s foreign-exchange reserves increased for a seventh month in a row in August to $3.09 trillion, according to official data released on Thursday. Hong Kong’s yuan deposits posted their first quarterly increase in two years in the three months through June, and extended the advance in July to 534.7 billion yuan.

“We could see more stop-loss trades that take the yuan stronger,” said Khoon Goh, Singapore-based head of Asia research at Australia & New Zealand Banking Group. “If we get a close stronger than 6.50 and the dollar stays weak, then the yuan rally can continue in the near term.”

©2017 Bloomberg L.P.