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Renminbi strengthens past Rmb6.5 for the first time in 16 months

The renminbi touched a new 16-month high against the dollar on Thursday as the greenback weakened. There are expectations the Chinese currency may remain strong ahead of the Chinese Communist Party’s congress next month.

The onshore renminbi firmed as much as 0.4 per cent to Rmb6.4996 per dollar on Thursday, the strongest level against the greenback since May 12, 2016. The move came as the dollar softened with the dollar index measuring the greenback against a basket of peers down 0.3 per cent.

Mansoor Mohi-uddin, senior market strategist at NatWest Markets, notes that Rmb6.50 mark against the dollar is a key threshold “as it represents the 50 per cent retracement of the move up from almost 6.00 in 2014 to almost 7.00 in 2017”.

The offshore exchange rate for the renminbi, which is not bound by the onshore rate’s trading band set by the country’s central bank, advanced as much as 0.5 per cent to Rmb6.5118.

Mr Mohi-uddin said options for the People’s Bank of China to arrest the dollar-yuan decline “appear to be constrained” ahead of the party congress, a five-yearly meeting of China’s leadership which starts on October 18.

Ahead of the event, clients we met in Beijing and Shanghai felt the monetary authorities could not publicly call for the yuan’s surge to ease. If senior officials at the central bank were to verbally intervene and foreign countries responded adversely, the exchange rate would become a very inconvenient issue at a critical time for China’s political leadership.

However, Mr Mohi-uddin also notes that with Chinese corporates looking to sell greenbacks, a stronger reversal in the dollar-yuan trend “may not be sustainable”.

Domestic companies have been caught out this year by accumulating foreign exchange at the start of 2017 and then being forced to sell after the authorities engineered a stronger yuan from May onwards to encourage foreign participation in the new China-Hong Kong Bond Connect.

The yuan also gained on Friday last week after set the currency’s trading band firmer and the latest reading on China’s manufacturing sector came in better than expected.