Yuan may rise more on weaker US dollar

The yuan may rise further this year due to a weakening US dollar and on the back of solid fundamentals of the Chinese economy, analysts said.

Last week, the Chinese currency reached a two-year high.

Factors like the expectation of a stabilizing Chinese economy, the continuous regulatory clampdown on risky leverage to curb risks, and the rising likelihood of interest rate hikes by the Chinese central bank would continue to support the exchange rate of the yuan against the dollar, according to Zhu Junchun, a foreign exchange analyst at Lianxun Securities.

The reference exchange rate of the yuan against the dollar set by the Chinese central bank rose to as high as 6.4372 last week, the highest level since December 2015.

Hussein Sayed, chief market strategist at currency trader FXTM, said that traders have been caught by surprise by the extent of the dollar's recent decline. The improving sentiment toward the Chinese economy has also played a role in the yuan's resurgence.

Sayed said the yuan could venture higher on the back of a weakening US dollar and the exchange rate could potentially test 6.4130 and 6.4000 in the near term.

The substantial gain of the yuan has reportedly prompted the Chinese central bank to change the way the currency's daily reference rate is set by adjusting the so-called counter-cyclical factor.

The People's Bank of China introduced the counter-cyclical factor last May in setting the daily reference rate of the yuan to curb irrational trading, market volatility and one-way substantial movement of the currency.

The reported move was interpreted by some analysts as the monetary authority's intention to ease the yuan's latest appreciation pressure.

If the yuan rises beyond 6.4 per dollar, the PBOC may "relax capital controls on outflows, and allow people to hold and exchange foreign currencies and assets more freely," Bloomberg quoted Shen Jianguang, chief Asia economist at Mizuho Securities in Hong Kong, as saying.

Khoon Goh, head of Asia research at Australia & New Zealand Banking Group, said the PBOC may set the fixing at a much weaker level or reintroduce the counter-cyclical factor with a bias to the weaker side, according to the Bloomberg's report.

But some analysts saw less likelihood for the Chinese central bank to guide a potential depreciation of the yuan.

"The latest round of the yuan's gain was mainly led by the weakening dollar. Its exchange rates against other major currencies remain stable," said Ding Wentao, an analyst at Soochow Securities.

China's foreign exchange policy will likely continue to focus on maintaining healthy two-way fluctuations and stabilizing market's confidence in the Chinese currency, Ding said.

Zhu at Lianxun Securities said that the counter-cyclical factor remains a viable tool for the Chinese central bank to guide market expectation of the yuan's value.

"If the currency sees substantial depreciation or appreciation in the foreseeable future, the central bank can still use the counter-cyclical factor to smooth market movements," Zhu said in research note.