China's yuan jumps to 16-month high, state banks step in to curb gains

China's yuan rose to its strongest level in nearly 16 months on Friday on bets that Beijing will unveil fresh economic stimulus following a jumbo U.S. rate cut, though gains were capped by dollar buying from Chinese state banks.

The onshore yuan strengthened to as much as 7.0420 per dollar, the firmest level since May 24, 2023, on track for a six-session rising streak.

Although China kept benchmark lending rates steady on Friday, confounding expectations for a cut, market watchers believe more support measures will be rolled out soon to prop up the ailing Chinese economy, with the Federal Reserve's easing path offering Beijing leeway to loosen policy without unduly hurting the yuan.

The Chinese currency has gained about 3% since late July, recouping first-half losses, as the dollar had plunged on U.S. rate-reduction expectations. The Fed cut rates by a larger than usual 50-basis-points on Wednesday.

"I still expect PBOC to cut rates in the coming months, as it is necessary to address the deflationary pressure in the economy," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

Lower Chinese rates could weigh on the yuan, but many believe Beijing's cuts would be milder than U.S. moves, and the negative impact would be offset by a potentially stronger economy if Beijing unveils bigger stimulus.

The yuan is also being bolstered by signs of increasing corporate demand as more exporters settle their foreign exchange receipts, in a trend that could accelerate.

On Friday, China's major state-owned banks were seen buying dollars in the onshore market to prevent the yuan from appreciating too fast.

"Concentrated dollar settlement by exporters will potentially increase forex volatility, pushing the yuan closer to 7.0 per