China's yuan held near a 3.5-year high against the dollar on Monday, October 12. Reuters, via Business Recorder, reports that lower expectations of an October US rate hike lent support, while simmering trade tensions could cloud the outlook.

Key Levels

  • Onshore spot: about 6.6920 yuan per dollar in late-morning trade.
  • PBOC midpoint: set at 6.7313 per dollar before the open, the firmest since February 2, 2023.
  • Trading band: the spot yuan may move 2% either side of the daily midpoint.
  • Dollar index: hovering near its strongest in a year and a half, even as data cut the odds of a follow-up Fed hike this month.

What Is Supporting the Yuan

  • Fed expectations: weaker odds of an October US rate hike reduce pressure on the yuan.
  • Exports: earlier reports this autumn pointed to strong exports and a large trade surplus as key support. August exports jumped 25% from a year earlier on high-tech and AI-related demand.
  • Policy tolerance: Investing.com said in September that the central bank had allowed its daily fixing to strengthen faster, which may reflect a tolerance for gradual appreciation. Goldman Sachs expects China to favor gradual appreciation of 3% to 5% a year.

What Is Holding It Back

  • Yield gap: China Merchants Futures says the widening gap between Chinese and US yields is also tempering the yuan's gains.
  • Safe-haven dollar: jitters over Europe's debt problems bolster the greenback.
  • Trade protectionism: an analyst cited by Reuters, identified only as Fan, warned that the rally faces speed bumps as protectionism rises.
  • Weak domestic demand: analysts noted in earlier coverage that demand inside China remains subdued.

The EU-China Car Deal

EU Trade Commissioner Maros Sefcovic said Friday, after talks in Beijing, that China and the EU reached a deal that could cut Chinese exports of hybrid cars to the bloc by more than half. The talks aimed to reduce the EU's ballooning trade deficit with China. Reuters cites it as an example of the trade risks facing the yuan.

The Year So Far

The yuan was up roughly 4.3% against the dollar this year as of mid-September, making it one of Asia's strongest currencies. Traders have expected gradual strengthening through the end of the year. A recent Trump-Xi summit also focused attention on trade, supply chains and Middle East tensions.

What to Watch Next

  • US CPI and PPI data on October 14 and 15.
  • The PBOC's daily fixings for hints on the pace of appreciation.
  • Further EU-China and US-China trade announcements.

Key Takeaways

  • The yuan trades near its strongest level since early 2023 on easing Fed-hike bets.
  • A wide yield gap, a firm dollar and trade tensions cap the gains.
  • Analysts expect appreciation to stay gradual.