(Bloomberg) -- China’s yuan climbed to its strongest since May as traders walked away from bearish bets amid a rebound in regional currencies and stronger prospects for US interest-rate cuts.
The currency at one point jumped more than 0.6% in both onshore and overseas trading, making it one of the top performers in Asia. Behind the gains was an increasing cohort of traders who are abandoning a crowded strategy that involves them borrowing the yuan cheaply and selling it against a higher-yielding currency.
The strategy, known as the carry trade, and concerns over China’s sluggish economy helped push the yuan to its weakest since October last month. Sentiment took an about-turn at the end of July, when a surge in neighboring yen spilled over and expectations the Federal Reserve is edging closer to a policy pivot gave a boost.
“The yuan carry trade unwind is now happening,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. “Considering there is a lot of dollars that exports have been hoarding for so long, this doesn’t just get unwound in one day. It could spark more panic selling by other exporters.”
The rebound in the yuan is welcoming news for Beijing as it gives the People’s Bank of China more room to ease monetary policy and support its flagging economy without worrying about the stability of the exchange rate. On Friday, clients of onshore banks have started to reassess their long dollar positions, while exporters increased foreign-currency selling in the spot and forwards market, according to traders who asked not to be named.
On Friday, the onshore yuan strengthened more than 0.6% to 7.1972 per dollar before trimming some gains. The next catalyst is the monthly report on US employment, which may show moderating job and wage growth in July and further support bets for rate cuts by the Federal Reserve.
“There’s still room for the carry unwind to go further which has supported yuan,” Ju Wang, BNP Paribas head of greater China FX/rates strategy, said on Bloomberg Television.”
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