Yuan strengthens to almost 7-month high
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The yuan surged to a near seven-month high yesterday, following news that China was mulling a new yuan pricing formula to enhance stability.
Spot yuan strengthened through 6.8 per US dollar for the first time since November 11 in early trade before retreating and settled at 6.8061 by the close of trade in China.
The 4:30pm settlement price was still nearly 0.2 percent firmer than the previous late session close.
Early in the day, the People's Bank of China pushed the reference rate for the yuan up by 0.8 percent, the midpoint's second-largest one-day appreciation since the currency was depegged from the dollar in 2005.
Some traders think the policy shift may have been in the works for some time to fix a flaw in the fixing mechanism which left the currency more susceptible to depreciation.
Authorities on Friday confirmed they are adding a "counter-cyclical" factor to their calculations of the daily reference point to curb persistent depreciation expectations. But they did not elaborate, and markets are puzzling over what the new "X" factor is, if it is quantifiable at all.
"The PBOC has let the yuan bulls loose in the China shop," said Stephen Innes, senior trader at OANDA in Australia.
"Needless to say, the market is a tad shell-shocked this morning while searching for some policy clarity from the PBOC."
Traders said major state-owned banks were selling dollars, which helped keep the yuan strong.
Earlier yesterday, the CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), the city's overnight yuan borrowing rate, jumped to 42.8150 percent, its highest in nearly five months.
The Hong Kong Monetary Authority responded in an e-mailed statement, saying that the interbank market on the whole was operating in an orderly manner after noting the tightness in CNH liquidity and that it had provided liquidity support to banks.
"We will continue to closely monitor the CNH market," HKMA said.
The yuan lost 6.5 percent of its value against the surging dollar in 2016, and analysts polled by Reuters have repeatedly predicted it would shed another 3-5 percent this year if the US Federal Reserve continues to slowly raise interest rates, buoying the greenback's appeal.
But so far this year, it has gained about 2.3 percent, and the appreciation of recent days has forced some analysts and investors to reconsider their outlook.
"The sudden surge in the yuan caused some panic among bank clients. Unlike the previous rallies in the yuan, this time, the one-way expectation of yuan depreciation has changed," a Shanghai-based trader at a Chinese bank said.
"Some clients were considering liquidating their dollar positions to stop losses. The next key level might be around 6.78 per dollar level," the trader said.
Investors in the last two weeks have increased their long positions on the yuan to the largest in almost two years, a Reuters poll showed yesterday.
Financial News, a newspaper owned by the PBOC, said in a front page commentary yesterday that adopting measures to stabilize expectations for financial markets and boost confidence is a good idea at a time when investor confidence was "relatively fragile."
"And it is more important to let the market understand that the Chinese economy has shown good and stable momentum, which would provide a solid base for stabilizing development in the future," the paper said.
Yesterday, the yuan midpoint was fixed at 6.8090 per dollar, lifting it 543 pips from the previous day's rate to its strongest level since November 10.
But the yuan is seen to weaken to 7.05 per dollar in 12 months, according to a poll of more than 50 foreign exchange analysts taken this week.
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