China’s yuan set for best weekly gain in two years; bumpy road ahead

SHANGHAI — China’s yuan edged lower

against the dollar on Friday but is on track to post its biggest

weekly gain in two years, buoyed by expectations of a slower

pace in U.S. rate hikes and China’s gradual exit from its

zero-COVID-19 policy.

Traders expect the yuan’s recovery to be slow next year,

however, despite signs of the dollar peaking, as China will

likely keep interest rates low, while some foreign investors may

hesitate to return to China assets due to geopolitical tensions.

The onshore yuan was changing hands around 7.0580

per dollar in late morning trade, a tad weaker than the previous

late session close.

Prior to the market open, China’s central bank set the

midpoint rate at 7.0542 per U.S. dollar, a two-week

high.

For the week, the yuan has gained roughly 1.5%, while the

dollar index fell to a 3-1/2 month low amid signs the

U.S. Federal Reserve will pivot away from rapid rate hikes as

inflation ebbs.

The Chinese currency has been bolstered by Beijing’s latest

measures to stabilize the wobbly property market, and by signs

the government is preparing for an exit from strict

COVID-related curbs.

China will allow some individuals who test positive for

COVID to quarantine at home, among supplementary measures to be

announced in coming days, two sources with knowledge of the

matter told Reuters on Thursday.

“CNY rates are firmly on an upward trajectory while USD

rates appear to have peaked, suggesting that China-U.S. rate

differentials have bottomed,” DBS wrote in a note to clients.

That view was echoed by HBSC.

“The broad USD trend could shift once the Fed ends its

hiking cycle, mitigating volatility and improving the outlook

for EM FX,” HSBC wrote in an outlook report.

“We also assume China will pull through its economic and

COVID-19 challenges.”

However, HSBC expects the yuan’s recovery to be slow, and

bumpy.

“Inflows from some foreign investors in the West may return

only gradually given lingering concerns about COVID-19 policy,

geopolitical tensions and ESG matters,” the bank said.

“Mainland China’s interest rates will likely stay low for

some time to foster a sustainable recovery in the economy, and

as such, interest rate arbitrage activities among locals may

persist.”

The yuan market at 3:23AM GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint

0.97%

7.0542 7.1225

Spot yuan

7.055 -0.06%

7.059

Divergence from

midpoint*

0.07%

Spot change YTD

-9.97%

Spot change since 2005

revaluation 17.25%

*Divergence of the dollar/yuan exchange rate. Negative number

indicates that spot yuan is trading stronger than the midpoint.

The People’s Bank of China (PBOC) allows the exchange rate to

rise or fall 2% from official midpoint rate it sets each

morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan

* 7.057 0.03%

Offshore

non-deliverable 6.888 2.41%

forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint,

since non-deliverable forwards are settled against the midpoint.

.

(Reporting by Shanghai newsroom; Editing by Edmund Klamann)