Yuan Strengthens Ahead of Policy Meetings

China’s yuan reached a fresh four-year high against the US dollar on Monday, extending its gains as weaker oil prices and lower US Treasury yields weighed on the greenback.

The onshore yuan touched 6.6682 per dollar during trading, its strongest level since June 2022, before last trading at 6.6691. If the currency maintained its gains through the late-night close, it would record an eighth consecutive session of appreciation, its longest winning streak since May.

The offshore yuan also strengthened, trading at 6.6688 per dollar, up approximately 0.01% during Asian trading.

The currency’s advance comes ahead of several important policy meetings, with investors assessing the outlook for global interest rates and China’s economic policy direction.

Central Bank Seeks to Moderate Appreciation

Before the market opened, the People’s Bank of China (PBOC) set the yuan’s daily midpoint at 6.7162 per dollar, its strongest fixing since February 2, 2023.

The midpoint was 471 pips weaker than the Reuters estimate of 6.6691, marking the largest deviation toward a weaker yuan since September 23. The onshore currency is permitted to trade within a band of 2% on either side of the official daily fixing.

Although the PBOC has gradually strengthened its daily guidance this year, its fixings have remained weaker than market expectations. Traders and analysts interpret this pattern as an effort to manage the speed of appreciation rather than allow the currency to strengthen too rapidly.

Barclays analysts said the central bank appeared focused on preventing disorderly weakness while using its daily fixing to constrain the pace of gains as the trade-weighted yuan strengthens.

This approach highlights the balance facing policymakers: allowing currency appreciation while limiting abrupt movements that could complicate broader economic management.

Analysts See Further Potential for Yuan Gains

Goldman Sachs analysts expect the yuan’s appreciation to continue gradually, arguing that market forecasts and forward pricing may underestimate the potential for further gains given what they describe as the currency’s substantial undervaluation.

The bank maintained its 12-month target of 6.40 yuan per dollar, implying further appreciation from Monday’s trading levels.

However, Goldman Sachs also cautioned that currency appreciation alone would not resolve China’s economic challenges. The analysts argued that a stronger currency would need to be accompanied by support for domestic demand to address the country’s broader economic objectives.

The distinction is important because exchange-rate strength and domestic economic growth do not necessarily move together. A stronger yuan may influence import costs and international purchasing power, but sustaining broader economic activity also depends on internal demand and policy support.

Global and Chinese Policy Decisions in Focus

Markets are preparing for meetings of the Federal Reserve, Bank of Japan and European Central Bank later this week. All three are widely expected to leave interest rates unchanged, although investors will scrutinize their communications for indications of future policy direction.

Attention is also turning to China’s fifth plenum for signals about domestic economic priorities and potential policy measures.

The combination of global monetary policy and China’s domestic policy outlook could influence the yuan’s next move. Changes in US yields, dollar sentiment and expectations for Chinese economic support will remain important variables for currency traders.

What Currency Markets Should Watch Next

The key question is whether the yuan can sustain its recent gains while the PBOC continues to manage the pace of appreciation. Upcoming central bank communications and developments from China’s policy meetings may shape expectations for interest-rate differentials, capital flows and the currency’s outlook.

Further appreciation remains possible according to Goldman Sachs’ forecast, but the sustainability of the move will also depend on domestic demand and the authorities’ tolerance for a stronger exchange rate.