SHANGHAI: China’s yuan jumped to a near five-month high against the dollar on Monday, breaching a key threshold, as optimism over economic recovery following the country’s border reopening and seasonal demand for the local unit continued to lend support.
Both the onshore and offshore currencies strengthened past the key 6.8 per dollar level in morning trade, with some investors seeing further upside after both rates crossed the 200-day moving average, seen as an indicator of long-term market trends, in light of recent capital inflows.
After three years, mainland China opened sea and land crossings with Hong Kong and ended a requirement for incoming travellers to quarantine on Sunday, dismantling a final pillar of its zero-COVID policy that had shielded China’s 1.4 billion people from the virus but also cut them off from the rest of the world.
Hopes for economic recovery underpinned the market. The onshore yuan opened at 6.8150 per dollar and rose to a high of 6.7872 at one point, the strongest level since Aug. 18. By midday, it was changing hands at 6.7923, 312 pips firmer than the previous late session close.
Its offshore counterpart followed suit to hit a near five-month high, trading at 6.7980 per dollar around midday.
Prior to the market open, the People’s Bank of China (PBOC) set the midpoint rate at 6.8265 per dollar, 647 pips or 0.95% firmer than the previous fix of 6.8912.
The move in Monday’s official guidance rate, the strongest since Aug. 22, marked the biggest one-day strengthening in a month.
“China’s reopening, together with multiple policy pivots, has led to optimism on stronger growth outlook, which is supportive of RMB strength,” Tommy Xie, head of Greater China research at OCBC Bank said in a note.
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“Flow wise, potential increases in exporter RMB conversion may continue to support RMB heading into the Chinese New Year.”
Chinese exporters usually convert more of their FX receipts into the local currency for orders, bonus handouts and other payments ahead of the week-long Lunar New Year holiday, which starts on Jan. 21 this year.
“China’s reopening is still not fully priced in and USD/CNY may continue to move lower,” Hui Shan, economist at Goldman Sachs said in a note.
The investment bank revised its forecast for the yuan over a 12-month horizon up to 6.5 per dollar from 6.9 previously.
Separately, Guo Shuqing, party chief of the PBOC, said over the weekend the yuan will maintain two-day volatility but would generally appreciate in the mid- to long-term, but warned of inflation.
“High global inflation is easily transmitted (to China) through multiple links such as production and circulation. We must maintain a high degree of vigilance against this,” Guo said in an interview with People’s Daily.