China's yuan hits 6-years high against peers, investors see greater PBOC tolerance

SHANGHAI: China's yuan hit a near six-year high against major peers on Thursday, on investor views that authorities are likely to tolerate a rise in the currency, at least in the near-term.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3803 per dollar, 132 pips or 0.2% firmer than the previous fix of 6.3935, the strongest since June 2.

The firmer guidance pushed the yuan's trade-weighted basket index to 101.88, the loftiest level since Dec. 9, 2015 and up 7.42% year-to-date, according to Reuters calculation based on official data.

Currency traders believe the central bank is unlikely to be too worried about this round of yuan strengthening.

"Appreciation pressure remains huge, but authorities may not be too worried," said a trader at a Chinese bank. "Some appreciation is not going to hurt the broad economy much, as long as the pace of rally is still under control and without triggering strong rising expectations."

In the spot market, the onshore yuan opened at 6.3770 per dollar and was changing hands at 6.3762 at midday, 20 pips firmer than the previous late session close.

Some traders said dollar selling from corporate clients was heavy on Thursday morning.

Chinese companies traditionally have higher demand for the yuan toward year-end for various payments, prompting heavier dollar conversion into the local currency and driving the yuan higher.

Xie Yaxuan, chief macro analyst at China Merchants Securities, said a stronger yuan was generally more positive for China's economic growth and could help offset inflationary pressure.

"Against the backdrop of the positive impact from the yuan appreciation, (I suggest) maintaining a cautiously optimistic attitude towards the yuan rally," he said in a note.

Xie, who previously worked for the PBOC and FX regulator's Shenzhen branch, also suggested policymakers not try to verbally guide the yuan before it rises past the psychologically critical 6 per dollar level in order to allow market forces to determine near-term exchange rates.

By midday, the broad dollar index fell to 95.753 from the previous close of 95.814, while the offshore yuan was trading at 6.3758 per dollar.