12.01.202603:25:57UTC+00Yuan Rally Builds as Hedging Costs Fall

The offshore yuan appreciated to approximately 6.97 per dollar, reaching near thirty-two-month highs, as growing confidence in the currency coincides with reduced hedging expenses. Notably, one-year forward contracts enable investors to secure settlement rates lower than the current spot level, representing the lowest implied costs since 2022. Additionally, data indicates an increase in forward settlement activities at Chinese banks, highlighting a rising desire to manage currency exposure. Exporters are increasingly converting their dollar revenues into yuan, with banks consistently recording net foreign exchange sales on behalf of their clientele. This currency rally, which surged about 5% over the past year and recently surpassed the 7 per dollar threshold, is buoyed by a generally weaker U.S. dollar, China’s robust trade surplus, improving economic conditions, and consistent capital inflows leading up to the Lunar New Year. Moreover, the central bank’s guidance through firmer daily fixings has bolstered expectations that authorities are amenable to further yuan appreciation.