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UBS offers three the explanation why the Chinese language yuan is “enticing” proper now

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SINGAPORE – The Chinese yuan will see further gains in the short term, according to Dominic Schnider of UBS Global Wealth Management.

"The stars are really facing a stronger (Chinese yuan)," Schnider, director of commodities and foreign exchange / macro in the Asia-Pacific region at UBS, told CNBC's "Street Signs Asia" on Wednesday.

The Chinese currency has improved significantly so far this year, and data releases continue to show the country is ahead of its global competitors in recovering from the coronavirus pandemic.

On Friday morning in Singapore, the Chinese yuan on land was 6.6891 against the greenback, almost 4% stronger since the start of the year. The Chinese currency's offshore counterpart, which trades more freely than the onshore yuan, traded at 6.689 per dollar. Against the US dollar, it has also gained almost 4% since the beginning of the year.

China's onshore yuan, also known as the renminbi, trades within a narrow band set by the central bank, which intervenes to buy or sell the yuan if it deviates outside of this range to contain volatility.

Yuan tailwind

For its part, UBS Global Wealth Management has a short-term target of 6.6 for the Chinese yuan against the dollar. Schinder said there are three factors that are likely to strengthen the currency: economic growth, balance of payments, and inflows.

China's economy is growing faster than its Western counterparts, he said. China said its gross domestic product grew 4.9% year over year in the third quarter of this year, a sign that the economy has picked up speed again. In comparison, other economies such as the USA and countries in Europe do not expect any year-on-year expansion until the first half of 2021.

"The USA and Europe are already growing from quarter to quarter, but are far behind China," Schnider told CNBC in a follow-up email. This speaks in favor of FDI as well as risk-weighted assets in China such as the stock market and the yuan.

Second, China's current account surplus could rise to nearly 2.8% of GDP in 2020, compared to 1% of GDP in 2019, the analyst said.

"A growing current account surplus due to stronger exports and a smaller services account deficit tends to favor a stronger currency in the quarters ahead," he said.

The stars really stand for a stronger (Chinese yuan).

Dominic Schnider

Head of Commodities and Asia-Pacific Foreign Exchange / Macro, UBS Global Wealth Management

On the subject of tributaries, Schnider said the problem has "two angles".

First, the inclusion of Chinese government bonds in global bond benchmarks is expected to "trigger" inflows of between $ 100 billion and $ 150 billion over the next 12 to 18 months, he said.

Next, China has a "solid return carry" compared to the US, he said, referring to a strategy known as carry trade, where investors make a profit on the difference between interest paid and interest earned. This can be achieved by borrowing in a lower-yielding currency (such as the US dollar) to fund investments in higher-yielding assets elsewhere.

"Even if the volatility is adjusted, the (yuan) return transport is attractive," said the analyst.

With none of the countries in the group of 10 currently offering a return as attractive as China, portfolio inflows into the country are likely to remain strong, strengthening the yuan.

However, the upcoming US elections could still affect these forecasts.

"I think a lot of the changes would … depend on what happens here," he said, adding that the greenback weakness theme is expected to last through 2021 – a factor that may be reflected in the dollar-yuan pair.

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Katherine Clark