The yuan is rising in popularity among global central banks, which dovetails with China’s plan to expand its influence. Yet with the economy losing steam , a much stronger currency might not be in keeping with Beijing’s goals.
Nearly a third of respondents in a global survey of central banks intend to add CNY to their foreign currency reserves . That should increase appreciation pressures.
The yuan is at a five-year high versus its peers as neighbouring countries struggle with record-high COVID-19 cases , while China is effectively repressing the virus. So far, authorities have intervened verbally to slow the currency’s gains , while the daily USD/CNY benchmark has been close to forecasts, suggesting no added intervention.
However, curbing excessive yuan appreciation could be as important to Beijing as unleashing liquidity into the financial system . Officials expect trade growth to slow in the second half of 2021, despite blistering export data for June .
A popular narrative among CNY bulls is that yuan strength can mitigate the rising costs of imported raw materials, though officials have ruled this out . Anti-speculative measures in commodities appear to be their preferred approach .
If USD/CNY falls back below 6.4000, it could trigger a deluge of dollar-selling. Chinese FX authorities might work behind the scenes to ensure that doesn’t happen.
Source: Reuters (Reporting by Ewen Chew; Editing by Sonali Desai)