(Yicai Global) Nov. 8 -- The Chinese yuan, which has been sliding against the US dollar all year, rebounded strongly last week in the largest appreciation in a single day ever. However there remains great pressure on the redback to continue to depreciate and many foreign trade companies are waiting on the sidelines to see what happens, analysts said.

The overvaluation of the dollar is being reined in and the yuan’s outlook turns to be neutral. However, there is still depreciation pressure, Zhu Yanhua, a foreign exchange expert at Bank of Communications, told Yicai Global. The pandemic is still raging and the gap between Chinese and US treasury yields is widening, which does not help matters.

On Nov. 4, the US dollar index fell sharply on news that the US jobless rate had climbed, pushing the offshore yuan up by more than 1,500 basis points in the sharpest single-day gain ever. The surge was largely due to fears that the US Federal Reserve might pause raising interest rates as unemployment increases.

The exchange rate reversal meant that many hedge funds’ short positions on the offshore yuan were unwound, further fueling the strengthening of the yuan, Yicai Global learned from analysts.

The market is now waiting to see what happens on Nov. 10 when the US consumer price index, a gauge of consumer inflation, is released for October. Should inflation be slowing, the Fed is likely to reduce the pace of its interest rate hikes which will take pressure off the yuan.

Most Chinese companies that deal in foreign exchange are taking a ‘wait-and-see’ stance to avoid further losses, an international banker told Yicai Global. Some firms have rolled forward their expired settlement contracts in the hope that the yuan will appreciate next year.

Most small and medium-sized enterprises are not expecting the redback to further depreciate in the next three months, said Chen Guanlin, economist at Standard Chartered Bank’s China division, citing a recently conducted poll.

Editors: Dou Shicong, Kim Taylor