The yuan’s swift rise on China reopening bets is starting to look stretched for some market watchers, with near-term economic growth likely to be weak and supportive seasonal factors starting to wane.
(Bloomberg) — The yuan’s swift rise on China reopening bets is starting to look stretched for some market watchers, with near-term economic growth likely to be weak and supportive seasonal factors starting to wane.
The currency’s advance has stalled this week after it jumped to a five-month high of 6.75 per dollar on Tuesday. BNP Paribas SA warns that a yuan rally driven by improved sentiment could be shaky in a still-fragile economy, while Guotai Junan Securities Co. and China Zheshang Bank Co. say dollar sales by exporters, usually seen before Lunar New Year holidays, may start tapering off soon.
“Any profit taking in China stocks on domestic factors or concerns over a global recession could result in a squeeze in the dollar-yuan,” said Ju Wang, Head of Greater China FX & Rates Strategy at BNP. Historically, an advance beyond 6.65 per dollar has been coupled with strong exports and higher yields versus the US, two conditions which are not currently met, she said.
The cautious view on the yuan comes on the heels of bullish forecasts from Wall Street giants like Goldman Sachs Group Inc. and Morgan Stanley, which see the currency rallying to 6.5 per dollar and 6.65 respectively by year-end.
Still, skepticism over further gains is gathering momentum after the yuan hit its highest since October against a basket of trading partners’ currencies and with data Friday expected to show exports shrank for a third consecutive month in December.
The currency traded around 6.77 per dollar Wednesday, with its closely-watched relative strength index — a gauge of momentum — suggesting its more than two-month old rally had hit extended levels.
Holiday Impact
A supply-demand shift in the onshore yuan market could come as soon as next week, according to a China Zheshang Bank Co. note. Exporters’ currency conversion for salary payments could ease just before China’s week-long late-January holiday and demand for foreign currencies could rise due to outbound travel, they wrote.
Guotai Junan analysts see the yuan tumbling back to 7 per dollar this quarter, with downside risks stemming from weak exports and China’s continued monetary policy divergence with the Federal Reserve, they wrote.
Elsewhere, Bank of America Corp. and TD Securities warned this week the yuan’s outperformance isn’t sustainable, while Citigroup Inc said it is less optimistic about the yuan compared with China equities and credit. JPMorgan Chase and Co. strategists wrote in a note last week they’re looking to short the yuan once seasonal support for the currency subsides this month and market pricing of China’s reopening extends.
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