Yuan firms as exporters convert dollars before week-long holiday

SHANGHAI: The Chinese yuan displayed a notable uptick against the US dollar on Tuesday, as exporters accelerated the conversion of their dollar holdings into renminbi ahead of the upcoming National Day holiday. This move counterbalanced the negative impact of a robust greenback that had been hovering near a two-month peak. The yuan opened at 6.7094 per dollar and traded as low as 6.7057 as of 0245 GMT, marking a 61 pip increase from the final session's close.

The National Day holiday, a week-long break, commences on Thursday, with onshore trading set to resume on October 8. Economists predict the yuan will trade within the 6.5 to 6.9 range per dollar for the rest of the year, bolstered primarily by a sustained decline in the dollar index. Zhang Ming, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, commented on this expectation in an interview with state media Securities Times.

Zhang suggested that if historical patterns persist, the present dollar index downtrend, which commenced in 2023, might endure until around 2033. Nonetheless, Zhang noted that there is a cap on further yuan appreciation, citing the potential for increased interest rates by the US Federal Reserve and a possible surge in US long-term bond yields. Despite this, the yuan has risen by 0.2% against the dollar this month and 4.3% so far in 2023.

Before market opening, the People's Bank of China set the midpoint rate at 6.7411 per dollar, which was 234 pips lower than a Reuters estimate. The tightness of this deviation has not been seen in two months. The spot yuan is permitted to trade within a 2% band of the fixed midpoint daily. Should the yuan appreciate too rapidly, potentially undermining China's foreign trade, capital flows, and asset prices, the central bank has at its disposal a robust toolkit and extensive experience to manage such scenarios.

These could include tightening macro-prudential management of capital flows and enacting counter-cyclical adjustments.

Meanwhile, the offshore yuan saw a slight increase to 6.7067 per dollar, marking a 0.09% rise in Asian trade. Meanwhile, the dollar index, which gauges the greenback's performance against a basket of six currencies, remained steady at 101.19.