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Yuan seizes 16-month top, underpinned by upbeat data, dollar woes

    HONG KONG, Sept 1 (Reuters) - The yuan jumped to its
strongest level in over a year on Tuesday, riding on improving
domestic data and a widening interest rate gap favouring the
Chinese currency.    
    The onshore yuan reached the strongest level
since May at 6.8181 per dollar while the offshore yuan
hit a July 2019 high at 6.8178. Both are up 0.4% on the day and
stood 5% stronger than their year-to-date trough in June.
    The currency has been rallying in recent weeks, largely as
China's economy has continued to build momentum after the
coronavirus-induced slump while the U.S. dollar has been under
pressure. 
    Chinese factory activity expanded at the fastest clip in
nearly a decade in August as manufacturers ramped up production
to meet rebounding demand, according to a private survey.

    The dollar lost 0.4% in Asia morning trade, and a widening
gap between Chinese interest rates over those of the United
States underpinned the yuan, said traders in Shanghai. 
    The Federal Reserve has cut its policy rate to zero
lower-bound while the People's Bank of China has been much less
aggressive in its loosening.
    Chinese 10-year government bonds yielded over
3%, while their U.S. equivalent traded at around
0.7% on Tuesday, according to Refinitiv data.
    The recent pledge by China and the United States to stick to
their Phase 1 trade agreement also proved supportive for the
yuan, despite the strained ties between the world's two biggest
economies over a broad range of issues.
    "While there is no specific trigger, momentum has attracted
a lot of investors to chase the yuan rally and dollar decline,"
said Ken Cheung, chief Asia FX strategist at Mizuho.
    Yuan shorts were squeezed as those betting on strength piled
in orders on Tuesday, said one of the traders.
    However, political risks remain in play ahead of the
November U.S. presidential election, said Christy Tan, head of
markets strategy, Asia, at National Australia Bank.
    "Nothing much has changed fundamentally," she said. 
    The PBOC appears comfortable with the appreciation, setting
the midpoint guidance rate at 6.8498, the strongest
since last June and near the Reuters estimate.

    As Chinese exports are stating to firm up, there is less of
a reason for Beijing to tame the yuan right now, Cheung said.
    
    
    The yuan market at 0410 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.8498   6.8605    0.16%
                                       
 Spot yuan          6.8205   6.8483    0.41%
                                       
 Divergence from    -0.43%             
 midpoint*                             
 Spot change YTD                       2.09%
 Spot change since 2005                21.35%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         92.89       92.72     0.2
 Reuters/HKEX                          
 CNH index                             
 Dollar index    91.807      92.183    -0.4
 
*Divergence of the dollar/yuan exchange rate. Negative number
indicates that spot yuan is trading stronger than the midpoint.
The People's Bank of China (PBOC) allows the exchange rate to
rise or fall 2% from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.82      0.01%
        *                        
 Offshore              6.982     -1.89%
 non-deliverable                 
 forwards                        
               **                
 
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint,
since non-deliverable forwards are settled against the midpoint.
.
    
    

 (Reporting by Noah Sin in Hong Kong;
Additional reporting by Winni Zhou in Shanghai and Xiao Han in
Beijing)
  
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