(Yicai) Jan. 29 -- The Chinese yuan has continued to show strong performance against the US dollar since the start of the year, breaching the key 7 mark twice after a gap of two and a half years.

The redback's central parity rate versus the US dollar was fixed at 6.9755 yesterday, up 103 basis points compared to the previous trading day, the China Foreign Exchange Trading System announced under authorization of the country's central bank. The onshore yuan closed at 6.9453 against the greenback, up 123 bps from the previous trading day.

On Jan. 23, the central parity rate of the yuan against the US dollar was raised by 90 bps to 6.9929, the largest single-day appreciation since Aug. 25 and the first time it crossed 7 in 32 months.

The redback's appreciation was not driven by a single factor, but rather by the synergy between the international market environment and domestic supply and demand dynamics.

From the external environment perspective, a "weak US dollar" pattern has provided significant external support for the appreciation of the yuan. Since the end of November, the US Dollar Index has declined to 97.51 from 100.22, or a drop of nearly 2.7 percent, with non-US currencies generally appreciating, according to a research report by China Galaxy Securities.

From the domestic end, the concentrated release of seasonal foreign exchange settlement demand has become the core driving force behind the strengthening of the yuan.

Following the recent continuous appreciation of the yuan versus the US dollar, the previously accumulated demand for foreign exchange settlement due to high export growth may accelerate its release, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International. The prevailing positive sentiment in the foreign exchange market is also becoming an important factor driving the stronger trend of the redback, contributing to it breaching 7, Wang added.

Starting from April last year, the surplus of banks' customer foreign exchange settlement and sales turned positive, noted Wang Jian, chief banking analyst at Guosen Securities. Since May, the surplus has recorded monthly figures exceeding tens of billions of US dollars, even reaching several hundred billion, indicating that residents have begun converting their foreign exchange holdings into yuan, Wang said.

Regarding the next phase, Zou Lan, deputy governor of the People's Bank of China, said that the yuan exchange rate is expected to continue two-way fluctuations and maintain flexibility. The PBOC will remain committed to letting the market play a decisive role in the formation of exchange rates, ensuring its flexibility, strengthening expectations management, preventing excessive adjustments, and maintaining the basic stability of the yuan exchange rate at a reasonable and balanced level, he noted.

The yuan exchange rate will exhibit a steady appreciation rather than a "rapid surge," according to Galaxy Securities. From a technical perspective, the next significant level may be around 6.85, with the exchange rate likely to continue to fluctuate in both directions throughout the year, without showing a one-sided appreciation trend.

The appreciation of the yuan benefits Chinese stocks, Galaxy Securities highlighted in a recent report. A steady appreciation helps alleviate concerns among international investors, reduces the risk premium on stocks, and attracts foreign capital inflows into the stock market.

The yuan is expected to maintain a relatively strong position after breaching 7, considering that exports will likely maintain robust growth in the first quarter, corporate demand for foreign exchange settlement may continue to rise before the Chinese New Year, market sentiment remains strong, and the US Dollar Index is unlikely to see a significant rebound in the short term, said Wang Qing.

However, the recent strengthening trend of the yuan is unlikely to persist throughout the year, and there may be some depreciation pressure against the US dollar by the end of 2026, Wang pointed out.

Editor: Martin Kadiev