SHANGHAI: The yuan firmed to a two-month high on Friday, heading for its biggest monthly jump since November 2023 as corporate demand for the Chinese currency grows amid heightening expectations for U.S. interest rate cuts.
It strengthened to as much as 7.0895 per dollar in morning trade, having risen about 2 per cent this month.
Increased dollar selling by Chinese corporates - triggered by shifting currency expectations - could morph into a "stampede" in the short term, boosting the yuan further, China International Capital Corp (CICC) said in a note.
But long-term yuan value is determined by China's economic fundamentals and risk appetite in overseas markets, CICC said.
The spot yuan opened at 7.0910 per dollar and changed hands at 7.0936 around midday.
Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 7.1124 per dollar, the strongest level since June 13.
The yuan's strength this month broke a trend of persistent weakness caused by yawning U.S.-China yield gaps and a domestic economy weakened by a deepening property crisis and anemic consumption.
"Recent strength in the yuan was mainly driven by exporters' higher willingness for currency conversion and the weakness in the dollar," CICC analysts Li Liuyang and Shi Jie said in a note.
"In the short term, we cannot rule out the possibility of a 'stampede' for currency conversion" that could boost the yuan above 7.0 per dollar, inviting potential dollar buying by the PBOC, CICC said.
Analysts estimate that Chinese exporters have amassed a U.S. dollar hoard at about US$500 billion, which could turbocharge the already rallying yuan if those businesses start buying the currency.
But some think a sustained rush for yuan by exporters is not likely, given fragility of China's economy.
"I'm not convinced about the story of Chinese entities and exporters itching to repatriate all their overseas holdings back to China," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. He said with China's stock market, manufacturing and property all struggling and the central bank trying to hose down a bond rally, there may not be too many other onshore options for investors to consider.