Forex Outlook: CNY Appreciates as Ruling Party Meeting Ends

on Nov 14, 2012

With the once-in-a-decade leadership meeting of China’s ruling party coming to an end, the yuan rose to a 19-year high, Bloomberg reported on 14 November 2012. The renminbi, which is the official name of China’s yuan, this week benefitted from the decision of the nation’s security regulator to increase the quota for China’s Renminbi Qualified Foreign Institutional Investor (RQFII) programme and was also boosted by speculation that the People’s Bank of China (PBOC) would intervene so as to prevent a rebound in inflation.

**Yuan Appreciates**
Bloomberg reports that data by the China Foreign Exchange Trade System showed that China’s currency strengthened 0.02 percent against the greenback, reaching 6.2252 per dollar in Shanghai. This is the yuan’s strongest level since China unified official and market exchange rates at the end of 1993. The yuan was generally off to a strong week on Monday, when it appreciated to a six-week high, boosted by positive export growth data, as well as by the decision of China’s security regulator to increase quota for the RQFII, the programme allowing yuan raised overseas to be invested in bonds and stocks in domestic markets.

“People are looking forward for economic reform in the future with the new leadership change,” notes Ang Kok Heng, chief investment officer at Phillip Capital Management Sdn, as quoted by Bloomberg.
**PBOC Speculation**
The renminbi’s upward movement is also boosted by speculation that the PBOC will withdraw cash from the financial market this week so as to prevent a rebound in inflation. Bloomberg reports that last week China’s central bank withdrew as much as 101 billion yuan (£10.2 billion) in five days. “The market speculates the central bank will drain some capital this week to guide the seven-day repo rate back to 3.35 percent, which appears to be the level desired by the central bank,” notes Wang Huane, a senior bond trader in Jinan at Qilu Bank Co, as quoted by Bloomberg.
Reuters reports that this week, 404 billion yuan in reverse repos will mature and drain cash. The PBOC injected 186 billion yuan into the money markets in its open market operations on November 13, but 78 billion of that was created by seven-day reverse repos which will mature next week, draining cash again.


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