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Yuan jumps to 2-year high, Bundesbank adds renminbi to its reserves
[SHANGHAI] China's yuan leapt to its highest in more than two years against the dollar on Monday, after a Bundesbank board member said the German central bank had decided to include the Chinese currency in its reserves and corporates offloaded their dollar holdings.
Both onshore and offshore yuan hit their strongest levels since December 2015 in early trade, with traders attributing the gains in the Chinese currency to dollar selling in domestic markets as the euro soared.
The dollar index, a gauge that measures the US currency's strength against six other major currencies, fell to its lowest since January 2015. As of midday, it stood at 90.825 compared with the previous close of 90.974.
"The yuan surged on the back of broader dollar weakness and is poised to make further gains this week," said Stephen Innes, head of trading for Asia Pacific at Oanda.
"The argument for the stronger yuan remains solid as regulators do not want currency weakness to divert attention from economic growth, investment inflow and regulatory reform."
The yuan also gained momentum on Germany's decision to include the Chinese yuan in its currency reserves.
"I can today say that also the German central bank the Bundesbank has decided to include renminbi in our currency reserves," Andreas Dombret, member of the executive board at Deutsche Bundesbank, told a Hong Kong financial forum.
Prior to market opening, the People's Bank of China set the yuan's reference rate at its highest in more than 1-1/2 years, at 6.4574 per dollar.
Monday's official midpoint was 358 pips, or 0.55 per cent, firmer than Friday's fix of 6.4932 and was the strongest since May 3, 2016.
In the spot market, the onshore yuan opened at 6.4566 per dollar and surged to a high of 6.4280 at one point, a level that was last seen on Dec 9, 2015.
As of midday, onshore spot yuan was changing hands at 6.4328, 337 pips stronger than the previous late session close and 0.38 per cent firmer than the midpoint.
Its offshore counterpart, mostly traded in Hong Kong, followed the strengthening trend. It jumped to a high of 6.4307 per dollar before settling at 6.4348 as of noon. The intraday high was the strongest since Dec 4, 2015.
"There was too much corporate dollar selling today, just too much," said a trader at a foreign bank in Shanghai.
He said the dollar sell-off by corporate clients had forced some market participants to follow suit and liquidate proprietary long dollar positions to stop the losses.
China is due to announce its Q4 and full-year gross domestic product (GDP) data on Thursday. Premier Li Keqiang told state media last week that he expected the broad economy to have expanded around 6.9 per cent last year.
"Markets remain comfortable with China's macro outlook, and should not be concerned about the recent tweak to the CNY fix mechanism," Win Thin, the global head of Emerging Markets Strategy at Brown Brothers Harriman, said in a note on Monday.
Domestic traders also said the market had digested the news last week that the central bank adjusted the way it set the reference rate for its tightly managed currency, suspending a tool for fine-tuning the exchange rate.
The yuan strengthened around 0.34 per cent against the dollar last week, but on a trade-weighted basis it edged up only about 0.05 per cent against a basket of currencies of trading partners, according to official data from the China Foreign Exchange Trade System (CFETS).
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.01, firmer than the previous day's 95.8.