China's yuan at strongest since july amid trade deal optimism

[SHANGHAI] China's yuan strengthened to a five-month high, punching past 6.9 per US dollar ahead of this week's planned trade-deal signing with the US.

The currency rose as much as 0.32 per cent to 6.8968 versus the greenback in Shanghai on Monday morning, the strongest since July 31. It pared the gain to 0.26 per cent as at 2.55pm local time. The offshore rate gained 0.2 per cent to 6.9014. The Bloomberg replica of the CFETS RMB Index, which tracks the yuan versus a basket of trading partners' currencies, increased for a fourth session to 92.33, the highest since early August.

China's economy has shown signs of recovery in recent months as global demand steadies and trade tensions ease, boosting investor sentiment. The US and China are scheduled to sign their "phase one" trade deal on Wednesday. Domestic stimulus efforts and expectations for further monetary easing are also helping to buoy risk assets.

"The yuan's outperformance since last week has reflected the improving risk sentiment, thanks to signs of the economy bottoming out," said Tommy Xie, an economist at OCBC. "While there's no obvious catalyst today, there's some speculation that China may get a better trade deal than expected."

Chinese Vice-Premier Liu He will lead a delegation to Washington to sign the first phase of the trade deal with the US from Jan 13-15, according to the Ministry of Commerce.

The yuan has strengthened since early December as US-China trade talks progressed. China's currency weakened past the key seven per US dollar level for the first time in a decade in August, when tensions between the two nations escalated.

"Nobody wants to take a short CNH (offshore yuan) position for now, which explains its strength," said Hao Zhou, senior emerging markets economist at Commerzbank AG in Singapore. "We will need some time to see whether USD-CNH would be consolidating at this time, which in my view is probably the case."

The scope for the yuan to rally further may be limited with another trade agreement beyond Phase 1 unlikely before US elections in early November, DBS Group Holdings Limited analysts including Philip Wee wrote in a note. "The Chinese yuan's appreciation for the Phase 1 trade deal may be limited to around 6.90."

BLOOMBERG