HONG KONG - China's yuan hit a record high for a fifth consecutive day against the struggling US dollar on Friday as investors worried about the economic impact of a long shutdown in the world's biggest economy.
In contrast to the US economic woes, latest data showed the Chinese economy expanded at a robust 7.8 per cent in the third quarter, signaling policymakers may have averted a sharp slowdown for now.
The strong data put the Chinese currency on track for its best weekly winning streak since February 2012 even as the dollar index hovered near an eight-month low.
By midday, the Chinese yuan rose to an intraday record high of 6.0915 per dollar (S$7.55) before pulling back slightly, compared to a close of 6.0982 on Thursday. It has hit a record in each session this week.
Driving the yuan's chunky 0.4 per cent gains this week against the dollar has been the noticeable absence of state-run banks from the foreign exchange market who usually buy dollars for the central bank.
Their heavy dollar purchases had kept the yuan in a tight range since August and boosted reserves.
China's foreign currency reserves exploded by upward of $163 billion in the third quarter of 2013, the largest absolute increase on record and the biggest percentage rise since February 2007.
The increase reflects market intervention by the central bank to keep the yuan from rising too quickly, which could attract more speculative inflows.
UBS strategists say the third quarter reserves growth was fully restricted to September and most likely after the Fed's policy decision, which caught global markets wrong footed who were expecting a tapering in its easy monetary policy.
As Beijing kept an iron-clad grip on the spot market, investors and banks took to the currency forwards market to bet on a stronger yuan causing a sharp rally in that space.
One-year onshore yuan forward points collapsed by more than 400 pips to below 200 pips in four trading sessions while one-year offshore yuan forward points hit a new record earlier this week.
That forced the People's Bank of China (PBOC) to relax its stance and let the yuan appreciate in the spot market.
By letting the yuan appreciate sharply this week, the central bank may also be preventing a likely dollar shortage that may occur down the road thanks to its massive purchases in the foreign exchange market, traders said.
But the yuan's rally may be coming to an end as forward points have started to settle and the central bank is quietly draining excess funds from the money market, indicating it is in no mood to start relaxing its policy despite heavy inflows.
Maturing central bank bond repurchase agreements will drain a net 58 billion yuan from China's money markets next week. The PBOC has injected a total of 170.7 billion yuan via open market operations so far this year.
"We are cautiously buying dollar/China at these levels,"said a trader at a US bank in Hong Kong.