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Chinese Yuan Flat Amid Disappointing PMIs, PBoC FX Intervention

January 6, 2021 at 13:28 by Andrew Moran

Chinese 100-yuan notesThe Chinese yuan was trading relatively flat against its US peer in the middle of the first trading week of 2021. The yuan, which has been on a tear over the last nine months, broke through the 6.5 resistance level earlier this week as the currency continues its impressive appreciation. But disappointing economic data and foreign exchange intervention may slow down the yuan’s surge.

The Caixin manufacturing purchasing managers’ index (PMI) came in at 53.0 in December, down from 54.9 in November. The market had penciled in a reading of 54.8. Output, inventories, and new orders rose at a softer pace. Buying levels jumped to a four-month high.

Overall, business sentiment remains strong, says Wang Zhe, senior economist at Caixin Insight Group.

We expect the economic recovery in the post-epidemic era to continue for several months, and macroeconomic indicators will be stronger in the next six months.

The services PMI clocked in at 56.3 last month, down from 57.8 in November. The composite PMI hit 55.8 in December, down from 57.5 in the previous month.

New order growth eased, export sales rose, and employment climbed for the fifth consecutive month for the services sector. Business confidence also rose to a ten-year high.

On Thursday, the People’s Bank of China (PBoC) will release its foreign exchange reserves data for December. It is expected to increase to close to $3.2 trillion.

As the yuan continues to appreciate and add to its 7% gain against the greenback over the last 12 months, will officials intervene? They might have already.

The PBoC announced late Tuesday that it would raise its macro-prudential adjustment coefficient for domestic firms making overseas loans. This, according to market observers, would boost foreign currency purchases and offset some of the appreciation. Ultimately, the PBoC is indicating its preferences, and these small interventions could begin the slowdown in the yuan.

This comes a month after the central bank stated that it would limit capital inflows by an unspecified amount to weaken the yuan’s strength. It also allowed it to be cheaper for traders to bet against the yuan and permitted onshore investors to acquire more foreign assets.

Although a stronger currency would benefit citizens, an appreciating yuan would impact the nation’s export-oriented economy, affecting its economic rebound in the aftermath of the coronavirus pandemic.

Still, the yuan remains up more than 1% against the buck this week.

The USD/CNY currency slipped 0.02% to 6.4547, from an opening of 6.4563, at 12:20 GMT on Wednesday. The EUR/CNY advanced 0.31% to 7.9659, from an opening of 7.9396.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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