- China’s Yuan Becomes an Improbable High-Yield Haven
As global investors turn increasingly risk averse amid tense relations between North Korea and the U.S., China’s currency is becoming an unlikely winner.
The yuan is the best performer among 31 major peers since Friday, rising 1.1 percent to 6.6605 against the greenback. That compares with a 1.5 percent tumble by the South Korean won or a 0.5 percent drop by the Australian dollar. While China is North Korea’s key ally, the nation’s central bank has been supporting the yuan with a series of strong fixings, and bearish bets against the currency have receded after it rose above 6.7 per dollar.
The currency, which at the start of the year traded at its weakest level since 2008, has roared back since the end of May as concern over capital outflows ebbed and optimism grew over the nation’s economic growth. This has sparked a virtuous cycle that’s prompted investors and companies who were previously hoarding dollars to buy the yuan.
“After the yuan went past 6.7, a lot of people that were holding the U.S. dollar started selling,” said Chen Long, an analyst at Gavekal Dragonomics in Beijing. “And the PBOC doesn’t mind or may even be happy to see that.”
An index that measures China’s exchange rate against a trade-weighted basket of peers has climbed for 10 straight days to its highest level since March 15, outpacing a rebound in the dollar. In recent months, the yuan has tended to follow the dollar’s moves against other currencies.
It’s not clear how long the yuan can hold its ground. Rising implied volatility suggests mounting concern a turnaround is imminent. This may be why the PBOC has been keen to support the yuan with stronger fixings. Currency weakness over the last three years has been a headache for the nation — fueling capital outflows and the perception in some quarters of the U.S. that the exchange rate has been pushed down to boost trade.
“In an environment of possible U.S. dollar recovery and heading into a seasonally bearish month for most Asian currencies, the PBOC might want to ensure yuan stability,” said Fiona Lim, senior currency analyst at Malayan Banking Bhd. in Singapore.