Yuan sets record vs dollar, traders ponder source of strength

 

China's yuan set a record against the dollar on Thursday morning, with its second quote coming in at 6.1183 per dollar, its highest since the Chinese foreign currency market was created in 1994.

 

Since that strong open the currency has continued to move into new territory, trading at 6.1174 per dollar at 10:09 a.m. local market time.

 

Traders struggled to explain the sudden resurgence in bullishness, with some attributing it to the central bank's custom of engineering rallies in the yuan prior to major diplomatic events, in this case the upcoming G20 summit in September.

 

The yuan has gained 1.8% so far this year, bucking a weak trend in emerging market currencies, but most of that gain was logged in April and May. It has flattened out since, and economists and traders have speculated that the central bank would move to stabilise the exchange rate, or even force mild depreciation, after surprisingly weak export data in June.

 

A bearish view was also supported by signs that capital is starting to flow out of the country, but that did not stop the currency from moving into new territory on Wednesday, and Thursday's strong open shows the spike was not a one-off.

 

A trader at a Chinese commercial bank in Shanghai said he was not sure whether the demand was coming from commercial banks or from the trading office of the People's Bank of China.

 

"Trading was light over these two days, meaning there is not an overwhelming trend for the yuan to appreciate," said a dealer at a foreign bank in Shanghai.

 

"That implies the invisible hand of the PBOC. With the G20 summit in early September drawing near, the yuan is very likely to stage another round of mild appreciation in line with China's long-standing practice of letting the yuan rise ahead of major political events."

 

The central bank set its official midpoint at 6.1703 on Thursday morning, up 0.04% from Wednesday's fix after the dollar index slid in overnight trade.