Chinese Yuan Surges After Beijing's Vow of Support

China’s yuan surged by over 0.5% on Tuesday after senior leaders vowed to ramp up support for the ailing economy.

The yuan jumped in the onshore and offshore markets as investors welcomed comments at the latest Politburo meeting, despite few details on exact stimulus measures.

The yuan traded offshore at 7.1444 per dollar and was at 7.1454 per dollar in the onshore market. Chinese stocks, especially property companies, also rose.

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“Overall, the sheer range of issues that the meeting touched upon goes beyond what the markets had anticipated,” Tommy Xie, head of Greater China research at OCBC, said.

“While the sweeping breadth of the topics was appreciated, the execution and depth of these policies will be the real test.”

Also propping up the yuan were China’s major state-owned banks selling US dollars to buy yuan in both onshore and offshore spot markets on Tuesday, sources said.

Aussie dollar, Euro also up, yen under pressure

The positive sentiment from China lifted the Australian dollar, often used as a liquid proxy for the yuan, which rose 0.4% to $0.6767.

In Europe, the pound rose 0.22% to $1.2854, its first day of gains after seven straight sessions of losses, its longest such streak since March 2020.

The euro also gained 0.12% to $1.1076, after slumping to a two-week low of $1.1059 earlier in the session, on the back of a survey on Monday which showed euro zone business activity shrank much more than expected in July

That caused traders to trim expectations of future rate hikes by the European Central Bank later in the year. Anything other than a 25-basis-point increase at Thursday’s meeting would come as a major surprise.

The Federal Reserve also meets this week and is expected to raise rates by 25 bps, with a majority of economists polled by Reuters expecting that to mark the last increase of the central bank’s current tightening cycle.

“While the Fed meeting (in July) is likely to be uncontroversial in terms of the decision on interest rates, the Fed’s statement and the press conference will be extremely relevant for markets,” Guillermo Felices, global investment strategist at PGIM Fixed Income, said.

Meanwhile, the yen remained under pressure at 141.30 per dollar, struggling to recover from heavy losses on Friday on a report that the Bank of Japan (BOJ) is leaning towards keeping its yield control policy unchanged at this week’s policy meeting.

“(BOJ) Governor Ueda has held his cards close to his chest, seemingly unpersuaded by the recent run up in Japanese prices and especially workers’ wages, and he has dropped few hints about an impending YCC tweak,” Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, said.