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China's yuan, which has climbed against the US dollar the past four days, advanced again early on Tuesday, supported by a much stronger official fixing and heavy corporate sales of the weakening dollar. The Chinese currency has risen about 1.2 percent against the dollar this year, after a roughly 6.8 percent gain during 2017, reversing three straight years of depreciation.
The People's Bank of China (PBOC) recalibrated the template for daily yuan fixings last week to nullify a discretionary counter-cyclical factor it introduced into the formula last year to contain the currency's decline. That, analysts said, meant the yuan would move in line with the currencies of its trading partners and was seen as an attempt by authorities to put a floor under the currency.
However, the dollar's broad and persistent decline has meant the yuan has continued to rise this week, past what some market participants saw as a line in the sand at the 6.5 level. The PBOC said last week it would let banks that contribute to its yuan fixing to determine the counter-cyclical factor but traders estimate the factor has stayed neutral since.
Prior to Tuesday's market opening, the PBOC set its official yuan midpoint at the highest level in more than two years, at 6.4372 per dollar. Tuesday's official midpoint was 202 pips, or 0.31 percent, firmer than the previous fix of 6.4574 on Monday and was the strongest since December 11, 2015. The official guidance rate largely matched market expectations and was interpreted by traders as indicating the PBOC remained comfortable with the yuan's recent gains.
The onshore yuan opened at 6.4405 per dollar and surged to a high of 6.4179 per dollar at one point in morning trade. As of midday, the spot yuan rate was changing hands at 6.4320, or 43 pips firmer than the previous late session close and 0.08 percent stronger than the midpoint. The internationalization of the yuan appears to have accelerated this year with more central banks considering to allocate some of their reserves in yuan.
The Bank of France said on Monday it already held some currency reserves in yuan, hours after the German central bank said it was looking to move some of its reserves into the Chinese currency. Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said in a note a steady outlook for the yuan and a further opening of China's financial markets should "provide support to RMB exchange rate in the medium term". Traders said the strength in the yuan was supported by continuous corporate dollar sales on the back of weakness in the greenback due to sharp rises in the euro.

Copyright Reuters, 2018

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