China's yuan rose to a near two-month high against the dollar on Monday, after the central bank lifted its official guidance fixing by the most since 2005 when Beijing abandoned the currency's decade-old peg against the greenback.
The yuan's rally coincides with a broad lift in market sentiment on official moves to help rescue the embattled property sector and the government's decision to ease some of the country's strict COVID-19 prevention controls. COVID disruptions and the troubled property sector have long been considered by China observers as the two main drags on the world's second largest economy.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 7.0899 per dollar, 1,008 pips or 1.42% firmer than the previous fix of 7.1907. Monday's official midpoint - the strongest since Sept. 27 - was the biggest one-day strengthening since the currency reform in July 2005, when China revalued its currency by 2.1% and revised rules governing the yuan.
The onshore yuan is allowed to trade in a range of 2% on either side of the fixing. "The fixing opened the upside room for the yuan," said a trader at a foreign bank. "It's possible that the yuan could strengthen past the key 7 per dollar today." The onshore spot yuan opened at 7.0850 per dollar and jumped to a high of 7.0322, the strongest since Sept. 21, before changing hands at 7.0390 by midday, 545 pips firmer than the previous late session close. Its offshore counterpart followed suit to touch more than five-year highs in morning deals before trading at 7.0293 per dollar by midday. "Investors rushed to cover their short yuan positions," said a second trader at a foreign bank. Ken Cheung, chief Asian FX strategist at Mizuho Bank, said uncertainties around the economic recovery will determine the yuan's direction.
"We will certainly see some improvements in economic data, but the extent is very uncertain," Cheung said. Separately, some market attention will be shifted to a meeting between top officials from the world's two biggest nations. Chinese leader Xi Jinping will arrive on the Indonesian island of Bali on Monday for a long-awaited meeting with U.S. President Joe Biden, ahead of a Group of 20 (G20) summit set to be fraught with tension over Russia's invasion of Ukraine.
The yuan market at 0401 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.0899 7.1907 1.42% Spot yuan 7.039 7.0935 0.77% Divergence from -0.72% midpoint* Spot change YTD -9.72% Spot change since 2005 17.58% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 106.679 106.292 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 percent from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 7.0293 0.14% * Offshore 6.8545 3.43% 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 Winni Zhou and Brenda Goh Editing by Shri Navaratnam)