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China's yuan surges most since January; rebounds from 2017 low

Gap between offshore 12-month forwards and spot rate spikes the most in more than two years

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The yuan was the strongest currency in Asia on Thursday although over the past three months, it has weakened about 7.8 per cent against the US dollar.

Hong Kong

CHINA'S yuan jumped the most in more than six months on optimism that trade relations with the US may thaw, with analysts also pointing to a rumour that authorities are seeking to limit onshore banks from lending to offshore counterparts. Stocks pared early losses.

The yuan surged as much as 0.79 per cent before paring its gain to 0.32 per cent as at 3.58 pm Beijing time. It was at 6.9120 per US dollar after sinking on Wednesday to the weakest level since January 2017.

The offshore-traded currency strengthened even more as it rebounded from a six-day loss. The gap between offshore 12-month forwards and the spot rate spiked the most in more than two years.

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The People's Bank of China (PBOC) restricted commercial banks from using some interbank accounts to deposit or lend yuan offshore through free trade zone channels, Reuters reported.

"Two reasons are supporting the yuan today: the restart of China-US trade talks, and the widespread market rumour that some banks at Shanghai free-trade zone are not allowed to lend the yuan to offshore banks," a move that could squeeze liquidity, said Gao Qi, Singapore-based foreign exchange strategist at Scotiabank.

"The yuan may stabilise at the current level or even strengthen in the near term, as sentiment improves on the trade front. Its fate in the longer-term hinges on the trade talks and Turkey."

China will dispatch Vice-Commerce Minister Wang Shouwen to the US for low-level trade talks in late August, the first official exchanges since earlier negotiations broke down two months ago.

Equities in Hong Kong and mainland China were volatile, as the trade news was offset by a decline in Tencent Holdings Ltd after the Chinese technology company reported its first drop in profit in at least a decade. The stock clawed back a little ground in the afternoon, paring its loss to 3.9 per cent from as much as 5.1 per cent.

The Hang Seng Index fell 1.7 per cent before bouncing back with a 0.3 per cent gain. It then slid again and was last down 0.9 per cent. The CSI 300 Index closed down 0.5 per cent after swinging from a loss of 1.8 per cent to a gain of 0.7 per cent.

"Some funds might be buying the dips after stocks dropped below key levels earlier, though I doubt any rebound amid a downturn would be strong enough to sustain," said Linus Yip, a Hong Kong-based strategist at First Shanghai Securities Ltd.

"Investors will likely remain cautious despite the latest sign that China and the US will return to the negotiation table. There have been some twists and turns before, and people expect more down the road on the trade issue."

The yuan was the strongest currency in Asia on Thursday. Over the past three months, though, it has weakened about 7.8 per cent against the US dollar as the PBOC eased monetary policy to support a slowing economy, and trade friction with the US worsened. Policymakers have made it more expensive to short the yuan, and urged banks to avoid "herd behaviour" in the currency market.

"Relief on China-US trade tensions cooled down expectations for further declines in the yuan toward 7 per dollar, and prompted some investors to trim their short yuan positions," said Ken Cheung, a senior currency strategist at Mizuho Bank Ltd.

"We maintain our view that policymakers will not let the yuan break 7 this year. The central bank will step up actions to stabilise sentiment if necessary."

In Hong Kong, meanwhile, the city's monetary authority again stepped in to buy up the local currency to defend its peg to the greenback. The de facto central bank bought HK$14.6 billion (S$2.6 billion) of local dollars on Wednesday, taking its spending on intervention this week to HK$16.8 billion.

Prior to this week's moves, the Hong Kong Monetary Authority had not stepped in since May. The currency was at 7.8495 per US dollar.

Tommy Xie, economist at Oversea-Chinese Banking Corp in Singapore said: "The news that the Chinese vice-commerce minister is visiting the US gives investors some hope for positive developments in China-US trade relations, which helps to boost sentiment on the yuan in the near term."

Francis Lun, Hong Kong-based chief executive officer of Geo Securities Ltd said: "Markets were oversold, and people started bottom fishing."

"In China, if you look objectively all the factors are negative - the economy is very clearly slowing down. It's a big reversal the people need to get used to."

Said Daniel So, CMB International Securities Ltd strategist in Hong Kong: "Retail investors are coming in to buy up the market - you can tell from the smaller transactions. The rally may not be sustainable because the big funds may still be trying to sell.

"Tencent's disappointing results is the major reason dragging the markets down today. Results are still the focus of the market now." BLOOMBERG

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