China Spurs Biggest Yuan Rally Since 2005 as Zhou Voices Support

Updated on
Yuan Rally Unlikely to Last: Panmure Gordon
  • PBOC strengthens reference rate by the most in three months
  • Containing depreciation expectations a top priority: Mizuho

China’scentral bank handed investors a confidence booster, strengthening the yuan’s fixing by the most in three months and talking up the currency as markets reopened after the week-long Lunar New Year break.

QuickTake The People's Currency

The yuanhad its biggest one-day advance since a peg to the dollar was scrapped more than a decade ago, as the currency caught up with a decline in the greenback during the holiday. China’s balance of payments position is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, People’s Bank of China Governor Zhou Xiaochuan said in an interview published in Caixin magazine over the weekend.

The currency appreciated 1.2 percent, the most since July 2005, to 6.4962 a dollar as of 11:29 p.m. in Shanghai, according to data compiled by Bloomberg. The offshore yuanrose 0.08 percent to 6.5035, broadly in line with the onshore rate. The People’s Bank of China raised its daily fixingagainst the greenback by 0.3 percent, the most since November. A gauge of dollar strength declined 0.8 percent last week, while the yen climbed 3 percent and the euro advanced 0.9 percent.

China Strengthens Yuan Fixing Rate

“In the near term, the stronger fixing and Zhou’s comments reflect the PBOC’s consistent view of stabilizing the yuan,” said Ken Cheung, a Hong Kong-based strategist at Mizuho Bank Ltd. “Containing yuan depreciation expectations and capital outflows remain top-priority tasks. Mild depreciation could be allowed, but that would be done only after stabilizing depreciation expectations.”

Governor’s Backing

The nation’s foreign-exchange reserves shrank by $99.5 billion in January, the second-biggest decline ever, as the central bank sold dollars to fight off yuan depreciation pressure. An estimated $1 trillion of capital left China last year, according to Bloomberg Intelligence.

China’s exports contracted 11.2 percent in January from a year earlier, the customs administration said on Monday, compared with a 1.8 percent drop forecast in a Bloomberg survey. Imports fell 18.8 percent, giving a $63.3 billion trade surplus.

The Group of 20 finance ministers and central bank governors meet in Shanghai on Feb. 26-27. China will likely keep the yuan stable before the gathering, but allow the currency to drop mildly against the dollar in the medium to long term due to weak fundamentals and capital outflows, said Qi Gao, a Hong Kong-based strategist at Scotiabank.

Yen, Euro

“The PBOC more or less judged the movements of the yen and the euro and saw that as a risk-off situation and fixed accordingly,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “They also probably continue to see capital outflows as well, which is why they fixed stronger.”

Some of the onshore yuan’s gains are catching up with those of the dollar and the offshore rate during the holiday, said Sue Trinh, Hong Kong-based head of Asia foreign-exchange strategy at Royal Bank of Canada. The currency traded in Hong Kong rose 0.9 percent last week.

A Bloomberg replica of the CFETS RMB Index, which is composed of 13 currencies, advanced 1.3 percent to a two-week high of 100.66. The official index was unveiled in December and the dollar has the largest weighting of 26.4 percent, followed by the euro and the yen with 21.4 percent and 14.7 percent, respectively.

The exports data "hint that the Chinese currency is still under pressure to weaken," Zhou Hao, senior economist at Commerzbank AG in Singapore, wrote in a research note.

— With assistance by Tian Chen, and Saijel Kishan

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