Yuan advances to new 3 year high as PBOC yet to show discomfort with recent gains

SHANGHAI: China's yuan advanced further to a new three-year high against the dollar on Thursday, as investors increased their bets on further strength in the Chinese unit after the Chinese central bank appeared not to show discomfort with recent gains.

Before market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.403 per dollar, 69 pips firmer than the previous fix of 6.4099.

Traders and analysts said the market had been carefully gauging the gap between their forecasts and the official guidance rates after the yuan breached the psychologically important 6.4 per dollar level this week to see whether the central bank would start to rein in the currency's strength.

If the midpoint was fixed on the weaker side of the market consensus and showed huge forecast error, that could mean the central bank was not happy with rapid gains this week to rise across the key level, said a trader at a foreign bank.

On Thursday, official fixing was 6 pips firmer than Reuters' estimate of 6.4036.

Absence of discomfort with yuan strength in the midpoint fixing pushed the spot price higher. The onshore yuan opened at 6.3935 per dollar and strengthened to a high of 6.3854, the strongest level since May 25, 2018. By midday, it was changing hands at 6.3861, 54 pips firmer than the previous late session close.

"The biggest negative impact of yuan appreciation is to reduce export competitiveness, but recovery of global supply is still on the way," said Zhang Yu, chief analyst at Huachuang Securities. "(Chinese) exports remain strong and bargaining power is sufficient. The stronger yuan has not caused significant damage to export competitiveness since the second half of last year."

Several traders said bullish bets on the yuan quickly grew, as seen in the options market. One-month risk reversals for the dollar against the yuan onshore, a gauge that measures the premium paid for calls over puts, plunged to -0.35 this week, the lowest since January. A negative reading suggested rising bets over yuan appreciation than depreciation.

At midday, the global dollar index fell to 90.037 from the previous close of 90.073, while the offshore yuan was trading at 6.3794 per dollar.