China’s yuan touched a near four-year high against the dollar on Wednesday and a 6-1/2-year high versus its trading basket, as authorities appeared to be taking a more tolerant of view of the currency’s strength.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint at 6.3246 yuan per dollar, 172 pips, or 0.27%, firmer than the previous fix of 6.3418. This was the firmest since April 2018.
The much stronger official guidance rate drove the trade-weighted CFETS basket index up to 103.5, the highest since August 2015.
The onshore spot yuan opened at 6.3220 per dollar and strengthened to a high of 6.3201, also the strongest since April 2018. By midday, it was changing hands at 6.3229, 28 pips stronger than the previous late session close.
“The Chinese yuan has actually appeared to decouple from euro/US dollar movements thanks to enhanced capital inflows,” Robert Carnell, regional head of research at ING, said.
Dealers said pre-lunar new year holiday corporate demand has helped push the yuan higher while the central bank stayed silent in recent weeks, raising speculation over how far and how fast the authorities would allow the currency to appreciate.
“The market is dancing on a knife edge,” said a trader at a Chinese bank, noting market participants have been carefully testing the authorities’ patience with a strengthening yuan.
The spot yuan has gained 0.5% against the dollar and more than 1% against a basket of trading partners so far this year.
The PBOC introduced policy measures to curb yuan gains last year when the yuan crossed key thresholds.
“Given that we usually see strong exporter demand heading into lunar new year, the PBOC will not step in at this stage,” Khoon Goh, head of Asia research at ANZ, said.
- Reuters, with additional editing by George Russell