Chinese Yuan Tests 6.5 As PBoC Tightens Liquidity, COVID-19 Vaccine Hopes

The Chinese yuan is extending its months-long rally on Tuesday after breaking the 6.6 threshold against the US dollar. The yuan, which has been one of the best-performing currencies in the aftermath of the coronavirus pandemic, has become an attractive play in foreign exchange markets, especially as policymakers attempt to make the yuan more prominent in international transactions.

With former Vice President Joe Biden almost certain to occupy the White House in the next couple of months, market observers think that the yuan will be driven mostly by President Donald Trump‘s successor. Analysts think that the relationship between Biden and Beijing will be less contentious than it has been for the last four years, which would be bullish for the yuan.
For now, it is unclear what policies Biden would pursue beginning next year, and he has not specifically indicated how he will differ from Trump on the world’s second-largest economy. But the consensus is that there would be more certainty, something that financial markets always desire.
Meanwhile, the yuan has held steady on news that Pfizer and BioNTech developed a coronavirus vaccine that is 90% effective. The announcement on Monday triggered a massive rally to kick off the trading week, but financial markets have pulled back somewhat on Tuesday. But the critical development was offset by soft domestic inflation data and the central bank’s latest moves to reduce liquidity, reversing some of its cash injections of the last several months.
According to the National Bureau of Statistics (NBS), the consumer price index (CPI) slipped 0.3% in October, the first monthly decline since May. Consumer prices rose at an annualized rate of 0.5% last month, falling short of the market forecast of 0.8%. The producer price index (PPI) tumbled 2.1% year-over-year in October.
This month, the People’s Bank of China (PBoC) has been removing cash from money markets, signaling that it is prepared to ease the pace of the yuan’s appreciation. But CIB Research said in a note that the currency’s advance is not yet over.

The yuan’s appreciation trend is yet to be over and it probably would rise above 6.5 per dollar thanks to China’s solid economic fundamentals, historically high US-China interest rate spread and potential weakness in the greenback.

Later this week, China will report new bank loans for October, as well as the broad M2 money supply growth. A Reuters poll of economists expects Chinese financial institutions will have issued more new net yuan loans from the same time a year ago.
The USD/CNY currency pair fell 0.13% to 6.6210, from an opening of 6.6296, at 13:31 GMT on Tuesday. The EUR/CNY slipped 0.1% to 7.8244, from an opening of 7.8319.
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Original from: www.earnforex.com