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Rush Out of Dollars Into Yuan Signals Good Days Ahead for Risk

Susanne Barton
Rush Out of Dollars Into Yuan Signals Good Days Ahead for Risk

(Bloomberg) -- Trade-deal optimism drove the Chinese yuan to a five-month high Monday, which could spur global economic growth and prompt investors to ditch the U.S. dollar in favor of riskier assets.

The Trump administration’s decision to stop labeling China a currency manipulator supported the move. A stronger yuan is good for growth and should encourage capital flows out of the safety of greenbacks, said Societe Generale strategist Kit Juckes, who recommends shorting the U.S. currency against the Canadian dollar, Norwegian krone and Swedish krona.

The rally may mean a “tighter policy for the Chinese and looser policy for the rest, but in the end, even China does better if the developed world it sells to is doing better,” Juckes said. “More demand overall helps China even if a stronger currency is a bit of a drag.”

Brad Bechtel of Jefferies also sees the improving U.S.-China trade dynamic pressuring the dollar as investors get comfortable taking more risks. He prefers the yuan, Indonesian rupiah, Philippine peso and Australian dollar.

The yuan advanced past 6.9 per dollar Monday, with the move accelerating after news broke that the U.S. plans to stop labeling China a currency manipulator. It held onto that gain after the manipulation report was officially released early in the Asian trading session Tuesday.

A weaker dollar may appease President Donald Trump, who has accused China and other major trading partners of weakening their currencies to juice exports. The overall U.S. trade deficit narrowed in November to the smallest in three years amid a thaw in the trade war with China.

Investors embraced risk Monday. The S&P 500 closed at a record high and Treasuries declined across the yield curve.

The yuan is sending signals this trend will continue, with technical indicators flashing bullish signals while multiple measures of expected volatility are hovering near their lowest in about five months, suggesting investors aren’t bracing for a retreat. The yuan has gained more than 4% since early September.

Deutsche Bank Chief International Strategist Alan Ruskin said it’s questionable whether the Chinese authorities would want the offshore yuan to go below 6.80, but “the market feels like there’s some room to the downside before the strength of the currency starts to generate its own sense of angst from monetary officials.”

He sees the currency headed in that direction, with a floor around 6.70.

(Updates fifth paragraph with official release of the report)

--With assistance from Emily Barrett.

To contact the reporter on this story: Susanne Barton in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Nick Baker, Elizabeth Stanton

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