The Chinese yuan significantly strengthened in the past few days as China announced further easing of its Covid control measures.
For the first time since mid-September, the Chinese offshore and onshore yuan broke the 7 level against the U.S. dollar, a key psychological level Chinese authorities have a history of defending.
And that’s just the start, according to one strategist.
“We’re just beginning to see the recovery in the currency,” Kathy Lien, managing director of FX strategy at BK Asset Management told CNBC’s “Street Signs Asia” on Thursday. She said the Chinese currency could strengthen even further to 6.8 against the U.S. dollar.
The currency weakened past 7.3 against the greenback in early November, its weakest since January 2008. However, it quickly recovered to 6.96 within about a month as Chinese health authorities continued to announce further easing measures.
Loading chart…
“Investors are underpricing the robustness of the potential recovery over the next couple of months,” Lien told CNBC, ahead of the scheduled release of a slew of Chinese economic data next week, which includes industrial production and retail sales.
“We’re going to see what is depressed Chinese data, turn into what is more consistent upside surprises,” she said. “That will renew the demand for the Chinese yuan and drive the yuan even higher than it is right now.”
Growth ahead
China’s pivot away from its zero-Covid policy has played an important part in optimism about its recovery.
Beijing has been rolling back the restrictions “pretty quickly,” and the surge in demand for the yuan comes with a sooner-than-expected easing measures, Lien said.
HSBC’s chief economist for greater China Jing Liu said the lifting of restrictions will boost growth further.
“The enhanced relaxation of COVID-19 measures, together with more proactive fiscal and accommodative monetary policies, may help to engineer growth of above 5% in 2023,” she said, adding that the latest adjustments in policy will “pave way for further relaxations.”
Lien of BK Asset Management said clarity in China’s health measures going forward is what could drive investors back to the Chinese market.
“There was a lot of uncertainty over the past months, particularly over the past couple of weeks, about how China would handle the protests,” Lien said.
“A lot of businesses have started to rethink their plans and I think everyone anticipated a longer period of zero-Covid policy,” she added.
