Experts attribute currency's strength to adjusted pricing model
The yuan's central parity rate against U.S. dollar remained strong for a sixth straight trading day on Wednesday, which experts attributed mainly to China's newly adjusted yuan-dollar pricing model.
Data from the China Foreign Exchange Trade System (CFETS) showed that Wednesday's central parity rate for the yuan strengthened 76 basis points against the dollar to 6.7858 - its strongest level since November 2016.
Meanwhile, foreign institutions boosted their forecast for the yuan.
Both Morgan Stanley and HSBC have raised their yuan forecasts to 6.9 against the U.S. dollar by the end of this year, in comparison with previous estimates of 7.1, according to media reports.
"The recent appreciation is the result of China's decision to introduce a -'counter-cyclical factor' into its existing yuan's pricing mechanism," Xu Gao, chief economist at China Everbright Securities, told the Global Times on Wednesday.
Such an adjustment was proposed by a working group under the China FX Committee, which aimed to moderate pro-cyclical fluctuations caused by irrational sentiment in foreign exchange market, CFETS said in a post on its official website on May 26.
The new mechanism was necessary to stabilize the Chinese currency, following Moody's decision to downgrade China's credit rating and amid rising expectations for a U.S. Federal Reserve interest rate hike in June, Xu said.
On May 24, Moody's Investors Service cut China's credit rating to A1, from Aa3, the first downgrade since 1989. On that day, the onshore yuan weakened 11 basis points to 6.8909 against the dollar.
The Wednesday's onshore yuan rates stayed steady at around 6.79. And the offshore yuan rates weakened by about 0.27 percent at 6.77.
Jing Ulrich, vice chairman of Asia Pacific at JPMorgan Chase, said at a press conference held in Beijing on Tuesday that the Chinese yuan may be supported by soft U.S. dollar.
JPMorgan predicted that the yuan is prone to be steady against the dollar for all of 2017, despite some short-term fluctuations.
Xu agreed, adding that in the following months, the dollar will confront depreciation pressure due to economic uncertainties under the administration of U.S. President Donald Trump.