US Dollar Index Gains 1% Week, But Chinese Yuan Leads Fray with Solid Economic Data

The US dollar index edged upwards to trade at one month high of over 94 Friday, following an extended rally for the 3rd day in a row against the backdrop of increasing Covid-19 infections and forthcoming US election results. The greenback ended the week with a gain of about 1.3% against the euro dollar.

The 10-year Treasury note yield increased to 0.863% Friday, the highest level in the past ten days, after the Fed minimized the barriers on its credit program for small firms, an initiative taken to increase the attractiveness of the rarely used facility.

Specifically, the Fed stated that it is minimizing the lowest possible loan amount to $100,000, from $250,000 and will slash limitations on debt for enterprises already taking part in the Paycheck Protection Program.

However, the real leader in the Forex market seems to be the Chinese yuan, which is trading at roughly 4% gains against the US dollar since the start of this year.

In the Friday Asian session, the onshore Chinese yuan traded at 6.6891 against the US dollar. The counterpart of the onshore yuan, which is allowed to trade with minimum limitations, traded at 6.6891 per dollar.

The onshore yuan, also referred to as the renminbi, trades within a narrow range set by the PBoC, which ensures stability of the currency by intervening in the market as and when the onshore yuan moves out of the pre-determined range.

Much of the yuan’s strength was derived from the solid economic data. The NBS Manufacturing PMI remained almost unchanged at 51.40 in October, after hitting a seven month high of 51.50 in the earlier month and a notch higher than the reading of 51.30 anticipated by economists.

The recent reading underlined the eighth successive month of growth in factory activity, against the backdrop of continuing rebound in the economy from the Covid-19 jolt. Output remained almost flat at 53.90 in October, compared with 54 in September.

Likewise, fresh orders stood unchanged at 52.80 in October. But, employment declined at a sharper rate at 49.30 in October, from 49.60 in September. During the same period, suppliers’ delivery time was nearly unchanged at 50.60 in October. Input costs rose quickly, reflecting the sixth continuous month of increase, to 58.80, from 58.50 in September.

Output price inflation also increased, mirroring the fifth successive month of growth, to 53.20 in October, from 52.50 in September. Going forward, business sentiment improved to 59.30, from 58.70.

The NBS non-manufacturing PMI for China rose to 56.20 in October, from 55.90 in the prior month, reflecting the quickest growth in the service industry since October 2013.

Fresh business opportunities index stood at 53 in October, slightly down from 54 in September. Also export orders fell to 47in October, from 49.10 in the September.

According to Dominic Schnider, an analyst at UBS Global Wealth Management, forecasts further strengthening of the yuan in the near-term.

Schnider, chief of commodities and Asia-Pacific foreign exchange/macro at UBS, said “The stars are really lining up for a stronger (Chinese yuan).”

Against the US dollar, the analyst has given a short-term target of 6.60 for the yuan. Schnider has stated that there are three criteria that will probably make the yuan stronger. They are economic growth, balance of payments and inflows.

The country’s economy is expanding at a quicker rate than the Western countries. In the third-quarter, the country’s economy grew 4.9% on y-o-y basis, signaling that the economy is gathering momentum. In contrast, other major economies such as the US are not anticipating y-o-y growth until 1H21.

Secondly, the country’s current account surplus could expand by roughly 2.8% of GDP, compared with 1% of GDP last year.

Schnider said “A growing current account surplus, due to stronger exports and a smaller service balance deficit, tends to favor a stronger currency in the quarters ahead.”