Yuan closes domestic session at over 2-year high on PBOC guidance, upbeat data

(Updates domestic closing price)

SHANGHAI, Oct 21 (Reuters) – The yuan advanced further to end the domestic session at a more than two-year high against the dollar on Wednesday, led by firmer central bank guidance and recent data showing a sustained recovery in the world’s second-largest economy.

The onshore yuan opened at 6.6699 per dollar and finished its domestic trading session at 6.6575, strongest such close since July 10, 2018.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.6781 per dollar, 149 pips or 0.22% firmer than the previous fix of 6.6930 and the strongest guidance since July 16, 2018.

Traders and analysts said Wednesday’s stronger official fixing largely matched market projections and drove the spot market higher.

“The yuan continues to strengthen due to its superior economic backdrop relative to other currency trades,” Stephen Innes, chief global markets strategist at Axi, said in a note.

“The better retail sales data for September continues to resonate and signals that domestic demand is holding up.”

Official data released this week showed China’s economic recovery accelerated in the third quarter as consumers shook off their coronavirus caution.

China’s Vice Premier Liu He said the economy will very likely achieve positive growth this year, adding that China’s prudent monetary policy should be kept appropriate and flexible, and liquidity reasonably ample.

Ming Ming, chief analyst at Citic Securities, attributed recent yuan strength to changes in Sino-U.S. relations, as differences between economic fundamentals, a softer dollar and disturbances from the U.S. presidential election all supported the yuan.

A trader at a foreign bank said the yuan could march towards 6.6 per dollar level in the near term if authorities do not step in. Several currency traders also noted how far the yuan could strengthen largely depended on the central bank’s stance.

“Yuan appreciation could have a contractionary effect on the economy, the central bank apparently does not want to see too rapid a rise in the exchange rate,” said Xie Yaxuan, chief macro analyst at China Merchants Securities.

“Although the central bank avoids direct participation in the FX market, it can still affect supply and demand of yuan and dollars through market-based methods.”

A second trader at a Chinese bank said he received rising number of client queries to trim dollar positions, while those who wanted dollars were holding back.

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