Firms from Goldman Sachs to Commonwealth Bank of Australia are predicting the record yuan rout engineered by China's central bank has run its course.
Since falling as much as 3.5 per cent from mid-January to the end of last month, the yuan has rebounded 0.4 per cent and is headed back toward its record high of 6.0393 per dollar.
One-month forward prices rose last week to the highest since March as the People's Bank of China lifted the official rate, which determines the band the currency can float in. Goldman Sachs strategists said the yuan is becoming "attractive" while CBA advised clients to exit a bet that it would weaken.
"It wouldn't be surprising to see the PBOC putting an end to the yuan's decline," David Loevinger, a former US Treasury Department senior coordinator for China affairs and now an analyst at TCW Group in Los Angeles, said in a phone interview on May 6.
"China has always been allergic to large exchange-rate movements. Too much appreciation induces capital inflows. Too much depreciation induces outflows."
PBOC members are concerned that the losses, if sustained, could eventually unnerve foreigners and threaten the overseas investment the country is counting on to boost flagging economic growth, according to Loevinger.
Phone calls to the PBOC's press office in Beijing last week seeking comment on the yuan's rebound weren't returned.
The onshore market rate for the yuan climbed to 6.2325 per dollar Monday from 6.2674 on April 30, the weakest intraday level since October 2012, according to prices compiled by Bloomberg. It has fallen 2.9 per cent since December 31, more than in any full year since 1994, when China unified the official and market rates.
The yuan has weakened for four straight months, its longest run of losses ever, and is this year's worst performer among 24 emerging-market currencies tracked by Bloomberg after the Argentine and Chilean pesos and Russia's ruble.
Strategists are speculating that the PBOC is now through with allowing the yuan to slide after it strengthened the official reference rate in seven of the last 11 days. The official fixing reached 6.1542 per dollar on May 7, from 6.161 on April 22, the weakest in seven months.
The central bank set the fixing on Monday at 6.1625, the lowest level since September 9, after a rally in the greenback. The currency is able to move 2 per cent higher or lower than that rate each day.
"There's absolutely no reason for the Chinese renminbi to devalue," said Philippe Jauer, the chief investment officer for global fixed income and currencies in Singapore at Amundi, which oversees about $1 trillion, said in a May 6 interview. "The Chinese currency should continue to appreciate."
The central bank had weakened the fixing from 6.0930 per dollar on January 14 as it sought to introduce a two-way trade in its currency and deter hot money.
After almost uninterrupted annual gains since 2005 that saw the yuan strengthen 33 per cent versus the dollar, speculators had come to see China's currency as a one-way trade, leaving the world's second-largest economy vulnerable to a sudden shift in investor sentiment. The PBOC bought dollars to weaken the yuan, boosting its foreign reserves by $127 billion in the first quarter to a record $3.9 trillion.
"The underlying trend in the renminbi hasn't really changed," Andy Seaman, London-based fund manager for Stratton Street Capital LLP's Renminbi Bond Fund, said in a May 9 phone interview.
"The goal of the Chinese government is to shift toward a more domestically-oriented economy and away from one that's purely export-based."
Some say the worst is still to come for the yuan.
Morgan Stanley recommends investors sell the currency as Taiwanese authorities crack down on yuan-denominated derivative products and as the economy slows. Gross domestic product grew 7.4 per cent in the first quarter from the year-earlier period, falling short of the government's full-year target of 7.5 per cent.
"Risks are skewed to the upside for the dollar on the back of recent soft China macro data and increasing tail risks from the ongoing deleveraging in the Chinese economy," Morgan Stanley analysts including Geoff Kendrick wrote in a May 8 report.
Traders in the forwards market have virtually erased bets that the yuan will decline.
Non-deliverable forwards touched 6.1595 per dollar on May 9, the strongest level since March 26, implying a drop in the yuan of just 0.02 per cent, compared with 0.4 per cent as recently as April 14.
"The risks are skewed for a further rebound in the yuan over the next few weeks," Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking, said in a May 6 client note. The higher fixings are "a signal that the authorities are more comfortable with market positioning in the yuan," he said.
Westpac predicts the yuan will climb about 3 per cent to 6.03 per dollar by year-end, making it more bullish than the 6.09 median forecast of strategists in a Bloomberg survey.
Now that the PBOC is stabilising its daily fixings, the yuan offers "attractive risk-reward," Goldman Sachs strategists including New York-based Robin Brooks said in a May 2 report.