(Bloomberg) — Traders ramped up wagers on a stronger yuan in the coming year, betting that increased global usage and an attractive valuation will guide China’s currency through near-term speed bumps.
The Chinese currency has risen more than 3% against the dollar this year on the back of strong tech exports. Now, expectations for further yuan gains over the next year are the most bullish since 2011, options pricing indicates..
So-called one-year dollar-yuan risk reversals — a barometer of positioning and sentiment — traded Tuesday at 0.37% in favor of puts, reflecting an optimistic outlook of further gains in the offshore Chinese currency. The gauge was at 0.05% in favor of puts a month ago. The premium of puts betting the dollar-yuan pair going lower has widened over calls that look for the pair to rise, even as the US-China summit last month produced few specific results on the currency front.
“Asia is home to some of the cheapest currencies in the world that have kept rising this year even during periods of dollar strength,” said Sameer Goel, head of EM and APAC research at Deutsche Bank. “We believe this theme can continue and we stay constructive on the yuan, looking for further gains versus the dollar toward 6.5 by year-end.”
The offshore yuan traded around 6.76 per dollar on Tuesday, near the strongest in more than three years.
“Yuan internationalization is a clear policy priority and an expanded role in cross-border trade and investment will create sustained demand over the years,” Goel said. The Chinese currency is also attractive from a valuation standpoint, he said.
A Bloomberg index of the Chinese yuan’s real effective exchange rate shows the currency has strengthened about 3.7% year-to-date versus a basket of its major trading peers, on an inflation-adjusted basis. Still, the gauge is now at levels last seen in 2013, when China’s trade surplus was about one-fifth of its present level. Yuan’s real effective exchange rate is also more than 13% below its historic peak reached in March 2022.
The surge in usage of the Chinese currency in global trade “has been especially notable since the Middle East conflict erupted,” DBS Group analysts including Mo Ji and Nathan Chow said in a client note on Friday.
In March, approximately 920 billion yuan worth of transactions were processed on an average day through the Cross-Border Interbank Payment System, Beijing’s global-payments solution for yuan-denominated trades, according to CIPS data. That volume is a record high and represents a more than 48% increase compared with February before the war in Iran broke out.
The global AI investment boom is also powering a new wave of Chinese exports, making policymakers in Beijing more comfortable with a stronger currency.
Samara Hammoud, a currency strategist at the Commonwealth Bank of Australia, expects the yuan to gain into year-end, bucking a stronger dollar.
“The People’s Bank of China has an apparent desire to see further yuan appreciation,” Hammoud wrote in an email.
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