Yuan Set for Biggest Weekly Gain Since April as Fed Gives Relief

  • China won’t want yuan weakness to be topic at G-20: strategist
  • Fed stops short of signaling a possible rate hike in September

The yuan headed for its biggest weekly gain in four months amid expectations the Federal Reserve will raise rates only gradually.

The Fed stopped short of signaling it could boost borrowing costs in September after its meeting this week, despite appearing more upbeat about the U.S. economy. The weaker greenback is making it easier for the People’s Bank of China to stabilize the yuan after its worst quarter on record as the nation prepares to host the Group of 20 summit in the eastern city of Hangzhou in September.

"They’re not likely to tolerate large depreciation pressures," said Roy Teo, a strategist at ABN Amro Bank NV in Singapore. "If the pace of depreciation since April were to continue, it could reignite market expectations that the PBOC is trying to devalue the currency. After all, China is hosting the G-20 meeting in September, so I think they do not want the currency to be a potential topic."

The yuan rose 0.38 percent this week to 6.6548 a dollar as of 4:52 p.m. in Shanghai, the most since the five-day period that ended on April 1, according to China Foreign Exchange Trade System prices. The People’s Bank of China strengthened its daily fixing by 0.13 percent on Friday. The exchange rate weakened 0.15 percent for the day, following its biggest gain since June 3 in the previous session.

The offshore yuan advanced 0.01 percent to 6.6604, taking its gain for the week to 0.33 percent.

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Fed officials said in a statement released on Thursday morning in Asia that near-term risks to the outlook have diminished and that labor utilization has shown “some increase,” though inflation remains too low. The premium of Chinese yields over U.S. peers is widening again as the Fed holds off on tightening while China refrains from cutting its benchmark rates following the last reduction in October.

A Bloomberg replica of the trade-weighted CFETS RMB Index, which tracks the yuan against 13 currencies, rose 0.15 percent this week.

While China is unlikely to allow sharp losses in the yuan before its entry into the International Monetary Fund’s Special Drawing Rights basket on Oct. 1, depreciation pressure could intensify again in the fourth quarter if the Fed turns hawkish, Teo added.

Ten-year government bonds climbed for a second month, pushing the yield down by seven basis points to 2.78 percent.

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