The offshore yuan strengthened to a three-week high on Friday amid expectations Beijing will unveil fresh stimulus measures during legislative meetings in coming days, boosting the currency to its

biggest weekly

gain in two months.

Speaking Friday morning on the sidelines of the leadership sessions, People’s Bank of China deputy governor Yi Gang said the nation’s currency and monetary policies will remain stable. The Shanghai Securities News cited him as saying that while the exchange rate “references” a group of currencies, it isn’t “strictly” pegged to that basket.

The offshore yuan traded in Hong Kong was quoted at 6.5027 in early trades on Friday, representing a 0.27 per cent increase from Thursday when it had risen 0.42 per cent.

The yuan rally over the past two days has more than offset losses in the first three trading days of the week, losses that were triggered after ratings agency Moody’s downgraded its outlook on Chinese sovereign debt to “negative” and after the People’s Bank of China cut the reserve requirement ratio for banks by 50 basis points.

At 6pm on Friday, the offshore yuan stood at 6.5123, putting the currency on track to post a 0.48 per cent gain this week, its biggest since January 11 to 15 when PBOC intervention saw the offshore yuan rise 1 per cent against a depreciation of 1.72 per cent the previous week. The yuan has appreciated 0.84 per cent against the US dollar this year.

Tommy Ong, managing director of treasury and markets at DBS Hong Kong, said the yuan’s gain coincides with weak US economic data released recently, which has put a damper on expectations on further US interest rate hikes this year.

“Traders also widely believe that during the ‘two [legislative] sessions’ Beijing will announce some stimulus measures that will benefit the economy and the yuan. This propelled the yuan jump from Thursday and the trend is likely to continue for a while,” Ong said.

“However, I don’t think the yuan would go much higher as Beijing has said it never wanted to see the yuan appreciate against the US dollar. The yuan is likely to keep trading at the current level,” he said.

Heng Koon How, senior currency strategist at Credit Suisse, said the yuan was trading strongly on Friday because various Chinese officials have made supportive comments over the past few days.

“The strong rebound in various commodity prices such as crude oil and copper also have helped to stabilise various emerging market currencies including the yuan,” Heng said.

“Overall, we believe the yuan strength this week is temporary,” he said. “There are concerns that China’s trade picture may deteriorate further. And China’s foreign exchange reserves are expected to fall further in February, although at a reduced pace than compared with January,” he added.

The People’s Bank of China on Friday set the yuan’s daily reference rate at 6.5284 per dollar, stronger by 128 basis points, after it was set stronger by 78 basis points on Thursday.

Traders also widely believe that during the ‘two sessions’ Beijing would announce some stimulus measures that would benefit the economy and yuan
Tommy Ong, DBS Hong Kong

The onshore yuan also rose to a three-week high of 6.5169 at 6pm on Friday, gaining 0.21 per cent from Thursday. The currency is now up 0.33 per cent for the week.

Meanwhile, the Hong Kong dollar remained stable at 7.7673 per dollar on Friday, unchanged from Thursday, and is up 0.07 per cent this week.

Additional reporting by Xie Yu