USD/CNY Tests 28-Month High As Economy Continues Recovery

The Chinese yuan is now testing its best level in more than two years against the US dollar. As China becomes the lone outlier in the global economy when it comes to the recovery, the yuan is joining the broader rally in the foreign exchange market. With the year 2020 winding down, is the next stop for the yuan 6.4? Better yet, will policymakers allow the yuan to appreciate that much?

On Monday, the People’s Bank of China (PBoC) reversed course by pumping liquidity into the banking system. Despite the central bank stating that it would suspend injecting cash into the financial sector, the PBoC put $121 billion into the system through the medium-term lending facility at an interest rate of 2.95% and a maturity within a year.
PBoC officials defended the action by noting that it aimed to preserve liquidity conditions and financially assist commercial and policy institutions. This, the central bank noted, would allow banks to borrow from the central bank using securities as collateral.
Because the economy is on a sound footing, the PBoC stated that it would not be necessary to embark upon liquidity operations through open market processes.
Later this week, Beijing will set its benchmark loan prime rate for November. It is widely expected that the central bank will keep its one-year LPR unchanged at 3.85%, and the five-year LPR steady at 4.65%.
On the data front, industrial production advanced 6.9% year-over-year in October, beating the market forecast of 6.5%. Retail sales surged 4.3% last month, up from the annualized rate of 3.3% in September. The unemployment rate dipped from 5.4% in September to 5.3% in October. The median estimate was 5.5%.
The positive economic data and liquidity support are enhancing the nation’s status as the only major economy anticipated to grow in 2020. This is also helping the yuan become one of the top-performing currencies in the global economy. Although Beijing is far from returning to pre-pandemic levels, fiscal and monetary support are facilitating notable growth for the world’s second-largest economy.
As the rest of the world attempts to recover next year, China already has a head start on its rivals.
Chang Shu, the chief Asia economist at Bloomberg Economics, wrote in a research note:

Looking ahead, growth is expected to stay robust through year-end and into the first few months of 2021. The recovery in consumption and exports should continue. Against this backdrop, we don’t see a compelling case now for further general easing in monetary policy — either a cut in interest rates or reserve requirements — this year.

The USD/CNY currency pair tumbled 0.4% to 6.5583, from an opening of 6.5847, at 13:59 GMT on Tuesday. The EUR/CNY fell 0.26% to 7.7863, from an opening of 7.8052.
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