Yuan to Confront with Resurgent Dollar as China Stands Back

After rebounding to a four-year high, the yuan faces stiff resistance from a Fed-driven dollar.

The Chinese currency faces increasing headwinds. PineBridge Investments says the yuan is on track to test 6.25% for the first time since August 2015 due to China’s current-account excess. Mobius Capital Partners LLP doesn’t dismiss a move to 6.21 this year. It would imply a gain of almost 3.1% from the current level.

Yuan enthusiasts bet on a more robust currency because of signs that the central bank plans monetary easing. The policy split with the Federal Reserve will put Chinese markets in the spotlight.

Senior portfolio manager at PineBridge Investments in London, Anders Faergemann, said that the trend is still in favor of a yuan. He also noted that Fed Chair needed to trace the support for rate hikes. He explained that the reality might differ as growth could slow as the U.S. mid-term election approaches.

The yuan’s rise could be gradual as it runs up against the greenback. Analysts expect the dollar to strengthen after Fed Chair signaled that policymakers might speed up the pace of rate hikes.

Overview of the Yuan

China’s currency dropped as low as 6.3698 on Thursday after the Fed meeting. However, it managed to rebound to 6.3201 the previous day. It marked the most substantial gain since the beginning of 2018.

Emerging market economist at Commerzbank AG, Hao Zhou, said that the Chinese authorities wouldn’t favor a powerful currency. He said that the conflict between markets and policymakers would continue for now.

The authorities have shown a slight tendency to rein in the yuan.

Last week,  Liu Guoqiang, a central bank Deputy Governor, talked about the current situation. While the yuan could differ from its balance level, he said that market and policy factors would help correct any imbalance.

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