Yuan jumps to 4-month high as China stocks rally, breaches key threshold

[SHANGHAI] The yuan rose to a four-month high against the US dollar on Thursday and breached a closely watched psychological level, underpinned by sustained capital inflows as global investors pile into a rally in Chinese stocks.

The onshore yuan firmed for a fourth straight session, ending domestic trading up 0.27 per cent at 6.9862 per US dollar, the strongest close since March 12.

The currency has gained about 1.16 per cent to the US dollar so far this week, and is on course for the best weekly performance since January 2019.

China shares extended a blistering run into an eighth day on Thursday, even as regulators cracked down on margin financing and state media warned of market risks.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 7.0085 per US dollar, 122 pips or 0.17 per cent firmer than the previous fix of 7.0207, and the strongest since March 16.

Several yuan traders said positions were heavy at the 7 per dollar level. Many corporate clients and investors sold their dollars after the yuan rose past that mark, accelerating gains in the local currency.

Chinese authorities allowed the yuan to weaken through the 7 mark last August for the first time in more than a decade as the Sino-US trade war intensified.

A Reuters poll published on Thursday showed that long positions on the yuan have risen to a more than five-month high as investors bet that a deluge of foreign fund flows into China's equity markets would continue, spurred on by signs that its economic recovery from the coronavirus crisis is building momentum.

Global investors have also been flocking to Chinese bonds, drawn by attractive yields.

Kevin Wu, head of global markets at Hang Seng Bank in Shanghai, said China's monetary policy response has also been relatively restrained compared with some developed economies.

"Against the backdrop of the US Federal Reserve's high-level easing, the US dollar will stay under pressure and could provide further upside room for the yuan," he said.

But Mr Wu noted that the yuan remained highly sensitive to Sino-US relations and warned that markets needed to pay close attention to developments.

Data on Thursday showed China's factory gate prices fell for a fifth straight month in June as the coronavirus pandemic weighed heavily on industrial demand, although signs of a pickup in some parts of the sector suggest a slow economic recovery remains intact.

A number of analysts recently upgraded second-quarter gross domestic product growth forecasts into the 2 per cent range, following a 6.8 per cent contraction in the first quarter.

REUTERS