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A rising Chinese yuan makes policy makers in other economies less nervous about a falling dollar, taking away a barrier to broad-based weakness for the U.S. currency, according to a top strategist.
Société Générale’s Kit Juckes observed in a Wednesday note that the yuan just moved into second place behind the Swedish krona USDSEK, -0.30% (see chart below) in terms of performance versus dollar in 2020.
Société Générale
The U.S. dollar rose 0.1% Wednesday to trade at 6.5607 yuan, but the Chinese currency has been on a tear this month. It’s strengthened 2% versus the dollar, bringing its year-to-date gain to more than 6%. This week it traded at less than 6.6 yuan per dollar for the first time since mid-2018.
The dollar has fallen versus major rivals in 2020, with the ICE U.S. Dollar Index DXY, -0.01%, which measures it against a basket of six major rivals, down 4.3% year-to-date. The euro EURUSD, -0.07% is up 5.8% versus the dollar so far in 2020, while the U.S. currency has fallen more than 4% versus the Japanese yen USDJPY, -0.29%.
As usual when it comes to financial markets, the yuan’s strength appears obvious in hindsight, Juckes said. “The domestic economy has withstood the pandemic better than most, the balance of payments got a boost from the shift in consumer spending globally during lockdowns, and whereas 10-year yields TMUBMUSD10Y, 0.876% have fallen by 107 basis points in the U.S. this year, and 38 basis points in Germany TMBMKDE-10Y, -0.550%, they’ve risen in China,” he noted.
The difference between bond yields are major, fundamental drivers of activity in currency markets. A rising yield relative to another country is generally a positive for a currency as it makes the first country’s assets more attractive to yield-seeking investors, all else being equal.
Meanwhile, a stronger yuan makes Chinese exports less competitive. Given China’s role as a global trade juggernaut and the world’s second-largest economy, that makes a weaker U.S. dollar somewhat less of a worry for other economies.
European Central Bank policy makers, for instance, made disapproving noises when the euro EURUSD, -0.07% rose above $1.20 earlier this year. The yuan’s subsequent rise means that the trade-weighted euro wouldn’t be back at its earlier peak if the shared currency pushed back above $1.20, Juckes explained in a Twitter exchange:
Secondly, the yuan is still up on the year against the most China-sensitive G-10 currencies, Juckes noted, leaving them room to rise versus the U.S. dollar.
The Australian dollar, New Zealand dollar and the Canadian dollar “still have some catching up to do,” he said, while the Japanese yen also “gets a ride on the yuan’s coattails as long as it holds these levels,” he said.
That said, Juckes said he’s wary of the broad consensus for a weaker dollar but would stand by his view that “this year’s collapse in US real yields is by far the most important driver of FX.”
