FX comment – Chinese yuan: potential pull back before resuming appreciation path

by: Roy Teo

Chinese yuan: potential pull back before resuming appreciation path

After breaking below the 6.1716 support on 5 August, the Chinese yuan has extended its gains against the US dollar to below 6.16 this morning as investor sentiment in the currency improved. Indeed, the onshore yuan is now trading at a premium to the daily fix for the first time since February this year. However, technical indicators are implying that the yuan is in overbought territory and hence some profit taking could follow in the coming days. In addition, we also expect the central bank to signal to the market that the recent sharp appreciation in the currency is not welcomed by engineering a weaker currency fix. Nevertheless, we maintain our positive view on the currency for the rest of this year as both the economic recovery takes shape and investor sentiment improves. Our year end target for the yuan remains unchanged at 6.10.