SHANGHAI: China’s yuan extended gains to reach its highest level in more than four years against the dollar on Thursday, underpinned by broad greenback weakness overnight, as investors re-assessed the US interest rate outlook amid renewed oil-driven inflation concerns.
Attention is now turning to a series of major central bank meetings next week, with the Federal Reserve, the Bank of Japan and the European Central Bank all expected to leave rates unchanged while maintaining a hawkish stance.
Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.7195 per dollar. The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.
Thursday’s midpoint was 439 pips weaker than a Reuters estimate of 6.6756 - its largest weak side deviation since September 23.
The central bank has been gradually strengthening its daily yuan official guidance this year, but at levels weaker than market expectations, suggesting it is seeking to manage the pace of appreciation, traders and analysts said.
“The fixing stance had not shifted with PBOC leaning against the speed of the USD/CNY decline as spot trades below fix,” Maybank analysts said.
“The spot-fix gap has not widened substantially and that suggests that PBOC is allowing the current direction of travel to continue.”
In the spot market, the onshore yuan touched a high of 6.6740 per dollar at one point, the strongest level since June 2022, before changing hands at 6.6749 as of 0238 GMT.
Its offshore counterpart last fetched 6.6744 yuan per dollar, up about 0.01% in Asian trade.
Trading was thin, with onshore spot prices hovering in an extremely tight range of about 20 pips and trading volume shrinking to about $10.6 billion.
Currency traders said strong exports and sustained foreign-exchange settlement have underpinned the yuan this year.
With the yield differential between China and the United States near its widest level on record, investors are closely watching the path of US interest rates for direction on the Chinese currency.
Fed funds traders see only a small chance of a Federal Reserve hike next week, with the next interest rate increase expected in December.
“If export proceeds and foreign exchange settlements continue, the yuan can remain stable or even appreciate while the US dollar index maintains its resilience,” analysts at China Merchants Bank said in a note.