Week In FX Asia - All Eyes On China's Growth Story

by: Dean Popplewell

The PBoC has ended the week guiding the Yuan higher via its daily reference rate, settling at 6.1041, a tad lower than Thursday close of 6.1065 mostly on the back of a weaker dollar overseas. CNY gained +2.9% against the dollar last year and +0.03% this week. However, trading continues to remain relatively thin ahead of this Mondays GDP release.

The market is expecting that China's GDP rose +7.6% on year, down from +7.8% in Q3. Many have been calling for the Yuan to break the psychological +6.0000 level sometime this year. They expect China to speed up their financial market reform, including allowing freer cross-border capital flow, which should be reason enough to eventually lead to a stronger Yuan.

A surge in China's foreign-exchange reserves will continue to add pressure on Yuan appreciation. Their fx reserves reached a staggering +$3.82-trillion at the end of last year, up from +$3.66-trillion in September. Breaking that down, China has boosted their US treasury holdings to a new record high last November (+$12.2-billion to +$1.3167-trillion). This is certainly a global market positive, as it's a sign that they are not worried about the rise in long-term interest rates. A steady foreign appetite for U.S. debt helps to contain the pace of rise in U.S. bonds yields that is occurring in anticipation of further tapering by the Fed.

China and Japans demand for U.S. assets is also a positive domestically for both the US consumer and businesses. Last Novembers treasury demand increase was the third consecutive monthly buy from China. Their healthy appetite for U.S. debt is a byproduct of the limited options available to park their massive foreign reserves acquired from their trade surplus with the U.S. China, similar to Japan, is unlikely to dump Treasuries because that would not only hurt the U.S., but China as well.

In the short term, the Yuan is expected to remain firm in this uptrend ahead of the Lunar New Year at month-end, mostly because of domestic demand remaining relatively buoyant.