PBOC may continue to guide yuan higher

The Chinese currency started the week slightly higher on Monday, as the People's Bank of China fixed the yuan's mid-point versus the greenback at 6.2114. The yuan closed flat against the dollar on Friday. Experts say China's currency may still continue its appreciation trend from here, even after a number of record peaks hit over recent weeks. Yin Hang has the details.

The tolerance level of the People's Bank of China for a sharp appreciation of the yuan - which has started on April 1st - is likely to continue.

The PBOC fixed the yuan's mid-point versus the the dollar at 6.2114 on Monday, slightly stronger than the 6.2152 mid-point set last Friday.

Although China's gross domestic product growth came in lower-than-expected in the first quarter of this year, experts project an even stronger yuan in upcoming weeks.

"I think the US and Japan's QE programs are likely to continue, if that is the case we will continue to have rich global liquidity and relatively loose monetary policy outside China. Meanwhile, inside China, we've just had a credit boom. So China's policy makers are intended to slow that down. The tighter monetary policies will be supportive to the appreciation of the yuan. So I think appreciation could probably continue for a little while," said Ken Peng, senior economist of BNP Paribas.

Last month, the renminbi appreciated around 0.8 percent against the US dollar. This is about three times the appreciation scale recorded last year.

Analysts say the driving force behind that points not only towards a higher expectation of China's economic growth, but also to loosening monetary policies in major developed economies.

"There is a lot of capital inflows in the first quarter of this year. The main driver is that the expectation for China's economy is improving. And more importantly, the quantitative easing programs in the US and Japan. And a lot of firms in China again are borrowing dollars, swapping for Renminbi...if they need RMB funding...So the "short dollar long RMB" trade is back in a fairly strong momentum," Ken Peng said.

But also, some forex traders are speculating that the rise in the midpoint settings is intended to give market forces room to let the yuan settle at a stronger level in preparation for a widening of the band.

Currently, the dollar/yuan exchange rate may rise or fall by 1 percent from the mid-point each day.