MNI: Yuan Seen Strengthening Against Crosses As Dollar Gains

The People’s Bank of China is likely to prevent any sharp appreciation of the yuan from about 7.20 against the dollar in the near term as talks are expected with the U.S., so any coming strength in the greenback would see China’s exchange rate gain against other currencies, advisors and traders told MNI.

The market is pricing in a stronger yuan and increased forex settlements from exporters, thanks to last week’s China-U.S. Geneva agreement, a Shanghai forex trader said, but added further appreciation will depend on the PBOC.  (See MNI INTERVIEW: Chinese Firms Should Hedge Dollar Risk-Guan Tao)

The yuan’s sharp decline on Wednesday followed the PBOC’s weaker-than-expected central parity fixing at 7.1956, compared to the market forecast of 7.1842, signalling the central bank’s reluctance to allow significant appreciation, the trader argued, noting it was the first time since Nov 2024 that the Bank had set the fixing below market expectations. The 114-pip gap between a weaker official fixing and firmer market expectations was the largest since Nov 2022.

A Hong Kong trader told MNI state-owned banks bought dollars on Wednesday to push down the offshore yuan, predicting the currency would likely fluctuate around 7.20 in the short term, with 7.15 the next key level should USD/CNY break below that threshold.

The PBOC is likely seeking to align the onshore and offshore yuan rates, and the daily fixing rate at around the 7.20 level, while avoiding a rapid appreciation beyond this critical threshold, the trader said.

Depreciation pressure on the yuan has eased after China and the U.S. agreed on trade talks and tariffs were temporarily wound back. This allowed the PBOC to scale back support, with the gap between the official fixing and market expectations narrowing to around 200 pips last week from over 1,000 pips in April.

Market participants have started to raise their yuan forecasts following last week’s tariff rollback, with Goldman Sachs now expecting it to strengthen to 7.0 against the dollar by year-end.

VOLATILE BANDS

A policy advisor said that the yuan’s performance will be shaped by the ongoing economic recovery and China-U.S. talks. While the PBOC is likely to contain the currency at around 7.20 for the meantime, once more information is available about the future shape of tariffs, likely after July, it could spend the rest of the year within a controlled range of 7.0-7.3 to the dollar.

However, the PBOC will act to curb excessive appreciation if needed, he added, stressing that a stable, two-way fluctuating yuan is the optimal strategy given current export conditions and tariff uncertainties. (See MNI: China Won't Make Japan's Mistake With FX Deal- Advisors)

The yuan could become a topic in future U.S. trade negotiations, as could be the case with other Asian economies with large dollar reserves due to trade surpluses, but China is unlikely to accept any arrangement resembling a so-called “Mar-a-Lago Accord”, he argued.

CROSS APPRECIATION 

The PBOC’s firm hand means the yuan should appreciate against the currencies of its major trading partners while the U.S. dollar strengthens amid renewed trade discussions, the advisor said.

A Shanghai-based trader noted that the PBOC’s incorporation of the counter-cyclical factor into its daily fixing set has significantly strengthened China’s exchange rate, leading to a positive correlation between the CFETS RMB Index, which tracks the yuan against a basket of major currencies, and the U.S. Dollar Index since late 2023.

As the "de-dollarisation" narrative fades, the euro and Japanese yen may face corrections, while the yuan remains relatively stable, driving a rebound in the RMB Index, he added.

The CFETS index dropped 2.8% to below 96 in April – its lowest since July 2023 – as the yuan’s appreciation lagged that of other major currencies against the dollar due to a stronger central parity rate.

The advisor also noted a gradual policy shift from focusing on the yuan-dollar to non-dollar pairs, such as EUR/CNY and JPY/CNY, along with the broader RMB Index. As China reorients exports toward Europe and Southeast Asia, managing hedging risks in the EUR/CNY pair will become a key priority going forward, he said.