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The onshore yuan hit a 2½-year high as USD/CNY fell below 6.90, with the PBOC signalling greater tolerance for strength.Summary:USD/CNY falls to 6.8954, lowest in 2½ years (since May 2023, so a bit longer)Onshore yuan (CNY) hits fresh multi-year highShanghai Composite rises 0.8% on market reopenPBOC sets firmer fix at 6.9414 with reduced dampingNarrower deviation from forecasts signals policy toleranceChina’s onshore yuan climbed to a fresh 2½-year high on Tuesday, with USD/CNY dropping to 6.8954 despite a slightly firmer official midpoint fix, underscoring growing momentum behind the currency’s appreciation trend.The move marks the strongest level for the onshore yuan (CNY) since mid-2023 and comes as China’s financial markets reopened after an extended holiday break. The Shanghai Composite Index rose 0.8%, reflecting a broader risk-on tone that may be helping the yuan outperform regional peers.The daily midpoint set by the People’s Bank of China came in at 6.9414, marginally firmer than the previous 6.9398. Notably, traders observed that authorities appeared to apply less “damping” in the fixing mechanism. The deviation between market forecasts and the official fix narrowed to around +250 pips from +350 previously, suggesting the central bank is allowing greater alignment with market pricing.The yuan is managed within a 2% trading band on either side of the daily midpoint. By setting a stronger reference rate and reducing the gap between model estimates and the official fix, the PBOC may be signalling increased tolerance for gradual currency appreciation.A firmer yuan reflects both domestic and external dynamics. Improved sentiment in Chinese equities, a softer U.S. dollar backdrop and renewed capital inflow expectations have contributed to the currency’s advance. The reopening of mainland markets also released pent-up positioning flows, amplifying the move.The break below the psychologically important 6.90 level could attract additional momentum-driven flows, particularly if the risk-positive tone in Chinese equities persists. However, policymakers will likely remain attentive to export competitiveness considerations, especially as global demand conditions remain mixed.For now, the 2½-year high underscores a shift in yuan dynamics, with the currency increasingly supported by market forces and a central bank appearing less inclined to lean aggressively against appreciation.
This article was written by Eamonn Sheridan at investinglive.com.
💡 DMK Insight
The onshore yuan’s surge to a 2½-year high is a game changer for forex traders right now. With USD/CNY dropping below 6.90, the People’s Bank of China (PBOC) is clearly signaling a shift in its currency policy, showing more tolerance for yuan strength. This could lead to a stronger yuan in the near term, impacting trade balances and capital flows. Traders should watch for how this affects related markets, particularly commodities priced in dollars, as a stronger yuan could dampen demand for imports priced in USD. The Shanghai Composite’s 0.8% rise indicates bullish sentiment, but keep an eye on volatility as market participants adjust to this new dynamic. On the flip side, if the yuan continues to strengthen, it could pressure Chinese exports, which might lead to a broader economic slowdown. Watch for key levels around 6.85 and 6.80 for potential support, as well as any comments from the PBOC that could signal a reversal in policy. Immediate focus should be on how USD/CNY reacts in the coming days, especially if it tests those levels.
📮 Takeaway
Watch USD/CNY closely; a break below 6.85 could signal further yuan strength, impacting commodities and trade dynamics.
