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In recent years, CNY has tended to strengthen from the beginning of the year, and leading into the Chinese New Year holidays. Economists at ANZ Bank see further gains in the yuan in the run-up to the Chinese New Year holidays in mid-February this year, given the large trade surplus and record high FX deposits being held. In addition, continued restrictions on international outbound travel will mean significantly reduced demand for USD this year, which will accentuate yuan strength.

Key quotes

“Over the past few years, the Chinese yuan (CNY) has shown a tendency to appreciate at the start of the year and heading into the Chinese New Year holiday period.The main driver behind this move is increased exporter conversion activity. We expect this Chinese New Year effect to be evident again this year. While the onshore CNY spot has appreciated by 1.1% year-to-date, the second best performing Asian currency so far (behind the Taiwan dollar), we see scope for further gains as Chinese New Year approaches.”

“We could see USD/CNY testing the key 6.40 support level in the coming weeks if the exporter conversions come through as we expect. However, one limiting factor could be whether the authorities are comfortable with the level of the CFETS RMB Index moving further above the key 96 level.”