The 11th of September 2017 saw the Yuan strengthen for the 11th consecutive day against the USD. The recent political turmoil that has caused economic instability and the devastating effects of hurricane Irma have helped Beijing’s central parity rate with the US. There have been a number of factors this year that have helped the yuan including Trump failing to follow through on many of the election promises he made. Although this seems like a background effect on the forex markets – his inability to deliver on foreign policy has left investors scared that the cannot deliver on any of the economic reforms that were promised in his much publicised “Make America Great Again” campaign.
Last week the yuan saw it’s longest continuous daily rising since 2005. The yuan’s central parity rate broke the all important 6.5 barrier for the first time since May 2016
(source: China Foreign Trade Exchange System), by strengthening 35 basis points. The entire year has seen the Chinese currency show strength against the USD but the movement in the past week has been what has caused the most noise in the markets. Last Friday the central parity rate rose 237 basis points and on the Thursday preceding this it rose 42. On September 1st the rate fell below 6.6, which was the first time since June of last year. The Chinese spot trading exchange market allows for rises and falls of 2% from the central parity rate on any given day. This rate is worked out by using a weighted average of the prices that are offered by the market makers. This occurs before the interbank market opens on each day.
The dollar index dropped right down to a two year low on Friday before slightly recovering and rising 0.2% the following Monday against six of the major currencies.
There are a number of different factors that are working together with the dollars recent weakness to make the yuan have one of its strongest years in the recent decade. China has recently imposed a much tighter management of capital outflows. The traditionally communist country is becoming less enamoured with keeping everything in house and more focused on taking the parts of a capitalist economy they need to to make it work for them.
Due to Trump’s positive comments on the trading partnership between the US and China, the risk and speculation of a US – China trade war has all but died down entirely which has helped the yuan significantly. Market sentiment is on the rise due to a strong economic performance from China in the last few quarters which has again helped the yuan become more of a feared competitor against the other major currencies.
Manufacturing activity is also on the rise and August saw it rise for the 13th consecutive month. The first half of this year saw the economy expand 6.9% which was a bigger increase the market analysts expected. China’s foreign exchange reserves rose for the 7th month in a row which has also had an impact – but even Chinese market analysts have not got faith in the trend continuing.
For investors of large scale funds riding the wave the risk may not be able to outweigh the reward, however for small time investors who are using trading platforms like CMC markets to trade online – riding the wave may bring short term returns with little risk in the last quarter. Although no one expects the yuan to go through a long term rally – it does not look like the short term increases are due to stop anytime in the near future.