China's yuan jumps to over 2-yr high in the wake of dollar weakness

SHANGHAI: China's yuan leapt to its highest level in more than two years against the US dollar on Monday, supported by demand from corporate banking clients who were dumping the sliding dollar.

Both onshore and offshore yuan hit their strongest levels since December 2015 in Monday morning trade, with traders attributing the gains in the Chinese currency to dollar selling in domestic markets as the euro soared.

The dollar index, a gauge that measures the US currency's strength against six other major currencies, fell to its lowest level since January 2015 on Monday. As of midday, it stood at 90.825 compared with the previous close of 90.974.

"The yuan surged on the back of broader dollar weakness and is poised to make further gains this week," said Stephen Innes, head of trading for Asia Pacific at OANDA.

"The argument for the stronger yuan remains solid as regulators do not want currency weakness to divert attention from economic growth, investment inflow and regulatory reform."

Prior to the market opening, the People's Bank of China set the yuan's reference rate at its highest level in more than 1-1/2 years, at 6.4574 per dollar.

Monday's official midpoint was 358 pips, or 0.55 percent, firmer than Friday's fix of 6.4932 and was the strongest since May 3, 2016.

In the spot market, the onshore yuan opened at 6.4566 per dollar and surged to a high of 6.4280 at one point, a level that was last seen on Dec.9, 2015.

As of midday, onshore spot yuan was changing hands at 6.4328, 337 pips stronger than the previous late session close and 0.38 percent firmer than the midpoint.

Its offshore counterpart, mostly traded in Hong Kong, followed the strengthening trend. It jumped to a high of 6.4307 per dollar before settling at 6.4348 as of noon. The intraday high was the strongest since Dec.4, 2015.

"There was too much corporate dollar selling today, just too much," said a trader at a foreign bank in Shanghai.

He said the dollar sell-off by corporate clients had forced some market participants to follow suit and liquidate proprietary long dollar positions to stop the losses.

China is due to announce its Q4 and full year gross domestic product (GDP) data on Thursday. Premier Li Keqiang told state media last week that he expected the broad economy to have around 6.9 percent last year.

"Markets remain comfortable with China's macro outlook, and should not be concerned about the recent tweak to the CNY fix mechanism," Win Thin, the Global Head of Emerging Markets Strategy at Brown Brothers Harriman, said in a note on Monday.

Domestic traders also said the market had digested the news last week that the central bank adjusted the way it set the reference rate for its tightly managed currency, suspending a tool for fine-tuning the exchange rate.

The yuan strengthened around 0.34 percent against the dollar last week, but on a trade-weighted basis it edged up only about 0.05 percent against a basket of currencies of trading partners, according to official data from the China Foreign Exchange Trade System (CFETS).

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.01, firmer than the previous day's 95.8.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.5635, 1.62 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.