The gap between Chinese and U.S. bond yields is narrowing, which analysts say will make appreciation of the yuan more difficult. U.S. President Joe Biden and Canadian Prime Minister Justin Trudeau pledged in their first video conversation to jointly offset economic competition from Beijing, as well as the dollar’s short-term negative impact on the yuan’s rise, making the prospects for further appreciation look less promising.
The dollar was down 0.08% against the yuan at 6.6411 as of 13:41 a.m. in Hong Kong.
The People’s Bank of China set the midpoint rate at 6.4615 per dollar before the market opened, 99 basis points weaker than its last fixing of 6.4516. The spot market opened at $6.4535 and was trading at $6.4614 at midday, 26 basis points higher than the previous session’s close. The onshore yuan will continue to fluctuate between 6.45 and 6.6, traders said.
“Given the lack of direction for the dollar in the short term, there is little chance for the yuan to appreciate,” the trader said.
The dollar fell to a three-year low against sterling and fell against commodity currencies on Wednesday as investors increased bets that a global economic recovery would boost risky assets.
Fed Chairman Jerome Powell reiterated that interest rates will remain low and that it will continue to buy bonds to support the U.S. economy. Many traders say this is negative for the dollar in the long term. But some analysts say the renminbi will face headwinds, given the shift in the yield differential between China and the US.
Bruce Yam, currency strategist at Everbright Sung Hun Kai, notes that the interest rate gap between China and the US is narrowing as US Treasury yields rise, which could put pressure on the renminbi.
Currency market participants also need to focus on the latest headline in U.S. -China relations, namely Biden and Trudeau’s pledge to work together to counteract China’s economic influence. Biden, who is seeking to turn a new chapter in his new administration, said in a phone call with Trudeau: “The United States has no closer friend than Canada, and this is my first bilateral meeting with you since taking office. People are not bargaining chips, and the United States and Canada will work together until the detained Canadian citizens are safely returned home. The United States and Canada will stand united against abuses of universal human rights and democratic freedoms, and strengthen our common commitment to providing safe havens for refugees and asylum-seekers.”
And then there’s Wally Adeyemo, Biden’s nominee for Deputy Treasury Secretary, who also reiterated that the United States should work with its Allies to hold China accountable to international rules to ensure a level playing field for U.S. and partner companies.
The Thomson Reuters HKEx Global Offshore Yuan Index, which tracks the offshore yuan against other currencies, stood at 96.07, up from 96.01 the previous day. The offshore one-year non-deliverable forward contract (NDF), considered the most forward-looking market gauge of the value of the renminbi, traded at 6.6364, 2.64 per cent below the midpoint.