Chinas yuan surged to its highest level in 2陆 years early Tuesday, but amid possible reasons such as trade war fears and technicals, it may have been anticipated dollar weakness that led to the move.
On Tuesday, the Peoples Bank of China set the yuans exchange rate at its highest level6.2816 yuan per dollar
since August 2015, when the foreign exchange fix had its biggest drop since the current systems inception. The currency pairs can trade within a 2% range around the reference rate. It is traded in an onshore and offshore form, with the latter moving somewhat more freely. One dollar last bought 6.2831 onshore yuan, and 6.2704 offshore yuan.
Read: Chinas PBOC guides yuan to highest level since devaluation
Market participants were fishing for reasons in a week that had plenty of news for Chinese assets, which could have led to more flows in its currency and pushed it higher, continuing a trend that began in late 2016.
For example, this week also marked the advent of a yuan-denominated oil contract. Upon its arrival on Monday, the crude-oil derivative jumped higher.
Read: China aims to shake up oil-futures market with own contract
In other assets, Chinas government bonds will be added to the Bloomberg Barclays Global Aggregate Index in 2019, which will open the door for more foreign investor participation in Chinas debt market.
But the yuans appreciation might even have a simpler reason, analysts suggested.
While the currencys uptrend has been around since December 2016, it could now be indicative of a Chinese government that doesnt want to accumulate more reserves, suggested Neil Mellor, chief currency strategist at BNY Mellon. One could argue that the new fix is frontrunning a new phase of dollar weakness."
Similar to the yuans strength, the U.S. dollar has been stuck in a rut for over a year, moving lower against the basket of its main rivals, as measured by the ICE U.S. Dollar Index
In the year-to-date, the index is down 3.1%, according to FactSet.
Dollar traders are worried about the so-called twin deficitreferring to a combination of the budget and current-account deficitthat could weigh on the greenback, as well as a U.S. economy that is inching toward the end of its growth cycle.
If the greenback continues to sell off, that puts pressure on the yuan given it is meant to be kept stable, Mellor said. The new fix, however, will help keep these pressures at bay.
Theyre just keeping pace with dollar weakening, said Brad Bechtel, managing director at Jefferies.
Of course we can only speculate about this, Mellor said. Still, the stronger yuan could also mean some more flexibility from the side of Chinese authorities to see its currency appreciate.
The new governor of the Peoples Bank of China, Yi Gang, on the weekend said that the currency would be broadly kept stable, but vowed to continue opening the country up to investors.
Moreover, the fixed level is correlated to the previous days closing level, and as the dollar-yuan pair sold off on Monday, breaking through technical barriers, more selling was triggered, market participants agreed.
So, for now, there might not be too much to see here. If the move was in the other direction, that would be more notable however, as it could be seen as retaliation over the trade rhetoric, Bechtel said.
With worries about possible trade wars on investors minds, in particular the offshore yuan has become ground zero for a lot of the trade tensions, Bechtel wrote on Tuesday. President Donald Trump pitched import tariffs on at least $50 billion worth of Chinese goods last week.
The market knows that China holds an ace up its sleeve with the yuan and could revalue at any time if they really wanted to ratchet up the trade war tensions, he added.
Drastic moves in the yuan, also reads through in other regional exporters, such as, including the Taiwan dollar
and South Korean won
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