BEIJING (BLOOMBERG) – The renminbi’s relentless advance against the dollar is raising expectations that it could hit levels last seen before its shock devaluation in 2015.
The near 1 per cent rally this week brought it closer to the most bullish calls on Wall Street, and drew a reminder from the People’s Bank of China (PBOC) that the authorities are closely watching the market. Strategists at Citic Securities, China’s largest brokerage, and Scotiabank expect the currency to strengthen to 6.2 against the dollar in onshore markets from the current 6.3840.
With China’s economy rebounding from the coronavirus pandemic and foreign funds piling into its equity and bond markets, the renminbi surged past crucial levels that have held for the past three years. The advance is creating a momentum of its own, drawing in investors looking for an attractive yield play in a world of low rates.
So far, the central bank has refrained from acting to slow renminbi appreciation, though a statement issued late on Thursday warned against one-way bets and predictions.
“The central bank is trying to downplay the market’s over-emphasis on the renminbi after two separate PBOC official speeches last week caught lots of attention,” said Mr Tommy Xie, head of Greater China research at OCBC Bank. Still, “the embedded structural dollar weakness may remain supportive of renminbi in the medium term”, allowing to rise toward 6.25 by year end, he said.
While the daily dollar-renminbi reference rate by the PBOC this week implied that it is comfortable with the recent appreciation, its latest statement suggested that policymakers are growing concerned about the increased focus on renminbi strength.
The foreign exchange market is in balance currently, and the rate could go either way in the future as many market elements and policies could affect it, the central bank said. It cannot be used as a tool to spur exports or offset higher commodity costs, the authorities emphasised, adding that “enterprises and financial institutions should adapt to a two-way fluctuation of the exchange rate”.
Bloomberg Economics chief Asia economist Chang Shu said: “Despite the neutral tone, the timing of the statement clearly indicates that the central bank is trying to break the psyche of appreciation.”
The PBOC has been neutral in setting its daily reference rate this week, tracking moves in the market rather than using it to limit appreciation. In the past, the authorities have used the fixing to signal when the currency is seen as moving in one direction too quickly.
Citic head of fixed-income research Ming Ming said: “With China’s strong exports, lower real rates in the United States and a dovish stance from the Federal Reserve overall, we believe that the renminbi still has room to appreciate.”
Chinese exports jumped more than 32 per cent last month in dollar terms, beating expectations as global stimulus fuelled demand. The rest of the economy, from industrial output to retails sales, have also shown strong growth.
The rally has turned the renminbi into Asia’s best-performing currency this year. It marched past 6.4 against the dollar in offshore markets on Tuesday, crossed the same barrier in Chinese markets on Wednesday, and then hit a five-year high against a basket of trading partners a day later.
“Even though the Fed has started to talk about tapering or start tapering, its balance sheet will continue rising – the dollar will keep weakening as markets get used to this idea,” said currency strategist Gao Qi at Scotiabank in Singapore. That will allow the renminbi to rise to 6.2 by year end, he said.
In the short term, Mr Gao has lowered his target for a short dollar-offshore renminbi trade to 6.3. “An orderly appreciation in the renminbi is acceptable to China’s authorities, but one-way speculation will continue not to be allowed by the PBOC as before,” he said.
The 6.2 target is also shared by other banks, including Westpac Banking Corporation.
BBVA Hong Kong chief Asia economist Xia Le said that while the renminbi may climb toward 6.3 per dollar by year-end, the central bank will not allow a “rapid rally to run forever”.
“Trade tensions between China and the US haven’t been resolved and it will hurt exports,” he said. “When the supportive factors such as strong exports falter in the future, China will then see quick capital outflows and rapid renminbi depreciation.”
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