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Chinese central bank’s decision to cut reserve requirement rates has shaken currency markets on Monday, triggering a sharp yuan decline. The analysts of some of the main international banks, however, are showing their doubts about the effectiveness of the move to curb yuan strength, boosted by the positive yield differential that is attracting steady inflows to China.

China’s economic strength will appreciate the yuan further

Eugenia Victorino, head of Asia strategy at Swedish Bank SEB in Singapore expects the impact of the PBoC’s measure to be short-lived: “In all previous instances, the impact of the regulatory change was temporary (…) We continue to expect the yuan to remain on an appreciation trend, with USD/CNY approaching 6.60 by end-2021,”

The analysts remind that the main reason behind yuan’s appreciation since May is that China has been leading the rest of the developed economies in coming out of the COVID-19 pandemic, which according to Reuters has soaked up capital flows.

In this scenario, the Reuters report continues, analysts expect the Chinese economy to keep growing over the next quarters as the rest of the world contracts. This would continue attracting capital to perpetuate the yuan rise.

With the spread between Chinese and US government bond yields at near-record levels, Analysts at Goldman & Sachs see the yuan appreciating to 6.5 per dollar from the current 6.7450 level.

Market reaction

The dollar posted a mild appreciation at the week opening, fon the back of the yuan sell-off, but the reaction was short-lived. The USD Index, traded lower on Monday for the fourth consecutive day, weighed by investors’ disappointment about the rejection of Trump’s COVID-19 stimulus proposal and the increasing uncertainty regarding the upcoming US presidential elections.