Yuan set for 7th straight quarterly gain as exporters sell dollars before holiday

China's yuan showed strength against the dollar on Wednesday, marking its seventh consecutive quarterly gain, as exporters increased their sales of dollars and positive factory data boosted market sentiment ahead of the National Day holiday. The Chinese currency had been on an upward trajectory since late 2023, driven by robust exports, favorable foreign exchange settlement flows, and a general decline in the value of the dollar.

The spot yuan opened at 6.7050 per dollar and closed the previous session at 6.7047, trading 18 pips higher than the previous day's close. Analysts at ICBC International attributed the yuan's appreciation to foreign exchange settlements, noting that holding dollars has not provided a relative advantage this year, prompting exporters to convert retained foreign exchange into yuan.

The yuan has risen 0.2% against the dollar this month and 4.3% this year. Exporters are expected to convert their dollar holdings to the local currency before the National Day holiday, which begins on Thursday. The People's Bank of China set the midpoint rate at 6.7351 per dollar, the strongest level since February 2, 2023, and 326 pips lower than a Reuters estimate.

The spot yuan is permitted to trade within a 2% band above or below the fixed midpoint rate each day. Positive sentiment was further supported by data indicating that China's factory activity returned to growth in September, as improved weather conditions allowed factories to resume operations and a surge in global artificial intelligence boosted the industrial sector.

Investors were also closely monitoring China's measures to direct cheaper credit towards infrastructure, technology, and homebuyer support, unveiled on Tuesday. While UBS economists acknowledged that today's measures may only be the beginning, with more substantial policy changes still on the horizon, the offshore yuan traded at 6.7055 per dollar, up approximately 0.03% in Asian trade.