China's yuan flat but further gains expected on strong exports

SHANGHAI: China's yuan remained stable on Monday, hovering close to a three-and-a-half year high against a weakening dollar, as traders seek insights into the Federal Reserve's interest rate trajectory and China's economic condition. Experts believe continued gains in the yuan are necessary to prevent renewed trade tensions, as China's robust exports are driving up its trade surplus.

Goldman Sachs pointed out that without such a move, the nation's substantial surpluses could provoke more protectionist reactions from trading partners, jeopardizing its external market access and export prowess.

On Monday, the onshore yuan fluctuated around 6.74 per dollar during the morning trading session, remaining relatively unchanged from the previous day's close. It reached 6.74400 per dollar at one point, marking the strongest level since February 2023. In the broader foreign exchange markets, the dollar approached a two-month low against major currencies as investors awaited the release of US inflation data this week, which could shed light on the Fed's policy direction.

Traders acknowledge that the yuan's strength is a combination of recent dollar weakness and strong exports. China's exports surged by 24% in July, surpassing market expectations, driven by the global AI infrastructure boom boosting demand for high-tech goods. Traders are also watching a series of July Chinese economic indicators to gain a better understanding of the economy's strength.

Nanhua Futures emphasized that the July economic data is crucial, stating that if indicators declined significantly, fresh stimulus policies are anticipated around the end of September.

According to Goldman, the robust exports and the yuan's undervaluation suggest a gradual rise in the Chinese currency over time. Before the market opened, China's central bank set the yuan's guidance rate at 6.7884 per dollar, the strongest level in three-and-a-half years.