China's onshore yuan closed at its strongest level in 10 months on Wednesday, reversing morning weakness as traders digested price data showing weaker-than-expected consumer inflation but easing producer deflation.
Analysts say the appreciation trend in the yuan is being helped by an expected US interest rate cut next week, a booming Chinese stock market and supportive policies from the central bank.
The yuan closed at 7.1210 per dollar, the strongest official closing level since Nov 5, 2024.
China's consumer prices fell at their fastest pace in six months in August, but producer deflation eased, data on Wednesday showed.
The People's Bank of China "will continue to inject liquidity amid weak inflation prints," DBS analysts wrote.
But pressure on the yuan would be partly offset by dollar weakness as soft US labour data heightens expectations the Federal Reserve will cut interest rates on September 17, they said.
DBS also attributed the yuan's recent strength to "stronger policy guidance after the second US-China trade truce paved the way for trade negotiations into early November."
China's central bank has over the past two months set the yuan's guidance rate with a strengthening bias, which some analysts see as a tactic in US trade talks.
On Wednesday, the PBOC set the midpoint rate at 7.1062 per US dollar, nearly 300 pips firmer than a Reuters estimate.
Sentiment in the yuan was also bolstered by a slump in bond prices as easing producer deflation fuels reflation bets, and money rotates into the bullish stock market.
China's 30-year bond yield, which moves inversely to prices, hit 2.105 percent on Wednesday, the highest level this year.
The yuan has firmed more than 3 percent against the dollar since early April, as Chinese stocks have also rallied sharply.
A strengthening yuan and the bull run for China's stock markets could feed into each other, according to Huafu Securities.
Reuters
