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China's yuan extends blistering 2017 rally to 7.5% after breaching key level

[SHANGHAI] China's yuan kept strengthening sharply against the US dollar on Friday after blowing past the key 6.5 per US dollar level a day earlier, and headed for its best week since revaluation in 2005.

The yuan's year-to-date gains against the dollar have topped 7.5 per cent, easily erasing the 6.5 per cent loss suffered last year.

The Chinese currency, coming back into the global spotlight, has strengthened more than 2,600 pips since the beginning of the August, an unusual run given it normally moves in a narrow range.

Prior to Friday's market opening, the People's Bank of China raised its official yuan midpoint for the 10th straight session, to 6.5032 per US dollar, the strongest since May 12, 2016.

The last time the midpoint had a stronger fixing for 10 consecutive days was in Dec 2010.

But Friday's midpoint - 237 pips or 0.36 per cent firmer than the previous one of 6.5269 per US dollar - was weaker than market expectations, traders said.

Their forecasts had suggested the guidance might be firmer than 6.5 per US dollar, the level the yuan broke through on Thursday, for the first time since May 2016.

"It seems that the PBOC intends to smooth the yuan appreciation pace as rapid appreciation in the yuan could harm the growth, especially for exports sector," said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.

He said he had expected Friday's midpoint to be around 6.49 to the US dollar.

The weaker-than-expected midpoint failed to cool the strong momentum in the spot market.

The onshore spot yuan opened at 6.4800 per US dollar, surged to a high of 6.4478 at one point before changing hands at 6.4600 at midday, 250 pips firmer than the previous late session close and 0.66 per cent stronger than the midpoint.

The intraday levels were the strongest seen Dec 2015.

If the spot yuan finishes the late night session at the current level, it will have gained 1.54 per cent for the week, the highest weekly gain since the yuan was revalued in July 2005. Last week, the yuan gained around 1.4 per cent.

At midday, the offshore yuan was trading 0.03 per cent weaker than its onshore counterpart at 6.4619 per US dollar.

Traders said Friday's yuan strength was supported by corporate dollar sales, along with broad weakness in the dollar in global markets following gains in the euro, as a policy meeting by the European Central Bank gave bulls cause for short-term optimism.

A trader at a Chinese bank in Shanghai said the market had believed that the 6.5 per US dollar level was the bottom for the yuan. But since the spot rate breached that level on Thursday, participants now were waiting to see when authorities would "start to purchase long dollar positions stuck at state-owned banks", he said.

Another trader at a Chinese bank said companies rushed to sell US dollars to reduce exchange losses on Friday, while proprietary trade was not affected after the yuan hit new highs against the greenback.

China's foreign exchange reserves edged up for a seventh straight month in August as a surging yuan and tighter regulations signal the tide may be turning in China's battle against outflows.

On Friday morning, official data showed that China's exports rose by 5.5 per cent from a year earlier, below market expectations, while imports beat forecasts, growing 13.3 per cent last month.

The August trade data had no impact on the spot yuan trade, according to market participants. But analysts said the soft China export figures should highlight the overshooting risk in the yuan.

"We remain cautious about the RMB overshooting risk and not favour to chase the RMB rally at this level," Mizuho's Mr Cheung said in a note.