China's Yuan touches five-month high ahead of US CPI

Yuan trades since the start of this year were on an upward trend

SHANGHAI (REUTERS) - China’s yuan hovered at a five-month high against the dollar on Thursday, as investors awaited US inflation data later in the session for more clues on the monetary policy outlook in the world’s largest economy.

Yuan trades since the start of this year were on an upward trend, shrugging off dollar movement in global markets, supported by border reopening optimism and seasonal heavy demand, currency traders said. But with sentiment gradually stabilising, the greenback and the pace of US tightening will again become key factors.

“Uncertainty around the US tightening trajectory is still high,” said a trader at a Chinese bank.

Markets expect that the Federal Reserve may be nearing the end of its aggressive monetary policy tightening campaign and that it may not have to raise rates as high as previously feared.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.7680 per dollar, 76 pips or 0.11% firmer than the previous fix of 6.7756.

The onshore yuan opened at 6.7590 per dollar and was changing hands at 6.7580 at midday, 70 pips firmer than the previous late session close.

It was not far from a near five-month high of 6.7510 hit on Tuesday.

The yuan has gained 2.1% against the dollar so far this year, reversing some of the losses it booked in 2022, which amounted to the biggest annual loss in 28 years.

Surging yuan takes a breather amid mixed credit data, easing expectations

Currency traders said the sudden fast yuan appreciation might have come to an end as markets have largely digested the reopening optimism, while heavy seasonal conversions of export proceeds ahead of the Lunar New Year would ebb soon.

China’s week-long Lunar New Year holiday starts on Jan. 21.

“Although the yuan strength continued, we don’t think it will be smooth sailing,” analysts at OCBC Wing Hang Bank said in a note.

“Domestic service trade deficit has room to grow, while the goods trade surplus may shrink as imports rebound,” they added, targeting the yuan at 6.75 per dollar by the end of this year.

Some banks also told their clients that the short-term yuan depreciation pressure may quickly emerge again as companies gradually head for the Lunar New Year holidays and their foreign exchange settlements greatly decline.

“And in the meantime, FX purchases against the backdrop of resumed outbound tourism will increase,” said a second trader at a Chinese bank.

Such currency demand surrounding outbound tourism contributed to a huge portion of the service trade deficit before the pandemic.