Forex Flash: Yuan appreciation appears to be a reflection of capital flows - BBH

FXstreet.com (Barcelona) - Brown Brothers Harriman analysts note that despite reporting disappointing data, China is still allowing Yuan to grind higher.

They see that it made a new 19 year high against the dollar after officials set a high fix for it (lower for the dollar) for the third day running. They write, “Recall that foreign reserve data showed nearly the same rise in Q1 as for all of 2012 highlights new capital inflows. However, the suspicions over the dramatic jump in exports to Hong Kong and Taiwan may mean that some of the inflows are coming from Chinese businesses themselves.”

In any event, they see that the yuan's appreciation appears to be a reflection of capital flows. They write, “It is true that the G20 will convene later this week, but to attribute the yuan's gains to window dressing ahead of it does not do justice to the steady grind higher for the past two months. In addition, given the disappointing data, the cuts in GDP forecasts, and Moody's reduction in its outlook for the sovereign rating from positive to stable, all could have provided easy cover to weaken the yuan today.”