The US dollar fell back after hitting a peak of 6.9895 against the yuan in the offshore market and has temporarily found support near the 100-day moving average.
Beijing has tried numerous ways to stem capital outflow, and the dollar index also happened to run out of steam. Both factors have contributed to a rally in the yuan and in other emerging market currencies.
Does that mean the weakening trend of the yuan is behind us?
The dollar index once soared to 103.8 points after the US election. However, it weakened recently after Donald Trump said the “strong dollar is killing us”.
But net long positions of the US dollar have rebounded to multi-year highs, according to CFTC data. That shows speculators remain bullish on the greenback.
After all, it’s questionable whether Trump’s remarks would end the dollar rally. Just look at how Bank of Japan tried to talk down the yen and failed repeatedly.
Also, Trump’s pledge to cut tax and expand fiscal spending may accelerate the rate hike which would further push up the dollar.
Therefore, dollar weakness may be short-lived, and it’s still too early to say the yuan has bottomed out.
China’s onshore market liquidity appears to be fairly tight since the bond market collapse in the fourth quarter of last year.
The onshore liquidity indicator has been hovering near a one-year low recently.
The Chinese central bank may cut interest rates or reduce the reserve requirement ratio later this year.
If China continues with its accommodative monetary policy while the Fed is on course to tighten its monetary policy, the policy divergence will put renewed pressure on the yuan.
This article appeared in the Hong Kong Economic Journal on Jan. 26
Translation by Julie Zhu
[Chinese version 中文版]
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