Yuan Faces Uncertainty After an Ongoing Rally

Doubts are growing about whether any economic upturn will match the yuan’s meteoric rises, which China’s reopening optimism has fueled.

The yuan erased over a third of its yearly loss last month. This happened before shooting past the crucial 7 per dollar level on Monday. The yuan should end the year at 7 per dollar. UBS Group AG strategist, on the other hand, claims it will weaken in early 2023 with large fluctuations if it doesn’t go beyond 6.95.

Growth numbers should be unsatisfactory. Moreover, virus outbreaks may increase. Analysts fear that the exuberance will fade as COVID restrictions ease. The dollar’s prospects remain uncertain until next week’s Federal Reserve meeting, which contributes to caution.

China’s Trade Weakens

On Wednesday, as mainland China’s trade weakened. Skittishness in the currency market was revealed, with the offshore yuan losing up to 0.3%. Even after authorities eliminated some COVID limits, the currency remained under duress. On Thursday, it dropped to about 6.98 cents per dollar.

The yuan’s one-month volatility gauge shows that option market indicators signal a mixed sentiment toward the currency. The expectations of future movements are still high. The rise in hedging costs reflected uncertainty in data on yuan volatility, which had turned more neutral a month ago to prevent the yuan from falling against the dollar.

Morgan Stanley economists warned this week that China is not prepared for a quick reopening. Its current vaccination rates and hospital resources are still questioned. According to Australia and New Zealand Banking Group Ltd, the yuan could fluctuate between 6.80 and 7.20 against the dollar in the coming months before reaching “coexistence with COVID.”

There is also market speculation on the People’s Bank of China pushing back against continued gains in the yuan. That’s a reversal of its earlier efforts to support the currency in the face of the Fed-driven dollar rally.

The official newspaper Securities Times published the article on Tuesday. The article says investors should prepare for uncertainty and volatility. COVID outbreaks may disrupt the market and rate-hike decisions in other economies. Xie Yaxuan is a macro strategist at China Merchants Securities. He warned that the dollar’s downturn and Japan’s currency intervention might endanger the yuan.