China’s yuan strengthens against US dollar, could grow even stronger

Buoyed by a weaker US dollar and the fast recovery of China’s economy after the coronavirus outbreak, this week the Chinese yuan (renminbi) hit its strongest level against the greenback since May 2019.

Both the onshore and offshore Chinese yuan extended weekly gains against the dollar on Friday. In one week, the renminbi rose around one percent, from levels above 6.83 against the greenback to the current rate of 6.75.

If the yuan continues to advance against the dollar, or at least does not give up its latest gains, it may become the best performer among its Asian peers. Spiking over four percent since the end of the June quarter, the renminbi is headed for the largest quarterly gain on record, according to Bloomberg data.

The Chinese currency could further advance against the US dollar, according to various outlooks. Goldman Sachs expects the onshore yuan to strengthen to 6.5 per dollar in one year, while analysts from JP Morgan believe the yuan may have “more catch-up to go.”

“As the dollar has entered this dollar depreciation, this weaker dollar environment, the (yuan) has somewhat lagged,” Alex Wolf, head of investment strategy for Asia at JP Morgan Private Bank, told CNBC.

While far from the two year-lows seen at the start of September, the dollar continued to face losses this week. The dollar index, which tracks the greenback against a basket of currencies, slipped to 92.83 on Friday, from above 93.33 on September 11.

China has become one of the few major economies which managed to avoid falling into recession during the coronavirus crisis. Strong exports, which were rising for several consecutive months, gave another boost to the Chinese economy and its national currency, analysts believe.

“Crucially for the renminbi, this strong economic recovery has partly been due to a jump in net trade,” said Julian Evans-Pritchard, a China economist at Capital Economics. “With China on course for a more pronounced recovery than elsewhere, its external position the strongest in a decade, and onshore yields unusually attractive by global standards, there is still room for further gains.”

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