SHANGHAI: China's yuan strengthened against the US dollar on Wednesday as market sentiment improved on better-than-expected first quarter Chinese economic growth data
In January-March, the economy grew 6.4 percent from a year earlier, matching the previous quarter's pace and defying expectations for a further slowdown, as industrial production jumped sharply and consumer demand showed signs of improvement.
Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said in a note that the "strong" data indicated that the economy is recovering and provides early signs that "aggressive fiscal and monetary easing" is bearing fruit.
The "growth divergence" between China and other economies could keep supporting the yuan, he said.
Prior to Wednesday's market opening and release of the first-quarter data, the People's Bank of China (PBOC) set the midpoint rate at 6.7110 per dollar, 13 pips weaker than the previous fix of 6.7097.
In the spot market, onshore yuan opened at 6.7100 per dollar and was changing hands at 6.7056 at midday, 72 pips firmer than the previous late session close and 0.08 percent stronger than the midpoint.
Some yuan traders said upbeat economic data and stability in the dollar index should benefit the yuan, but the local unit on Wednesday met strong resistance at 6.7 to the dollar, where there was corporate demand for the greenback.
Sign of liquidity tightness in the money market also supported the Chinese currency, although traders attributed that to seasonal factors as companies have to make quarterly tax payment in mid-April.
China's central bank unexpectedly drained a net 6.5 billion yuan ($969.64 million) via open market operations on Wednesday, even though it lent 200 billion yuan to financial institutions via its one-year medium-term lending facility (MLF).
Frances Cheung, head of macro strategy for Asia at Westpac in Singapore, said the overall PBOC operations reflected a "reduced urgency to ease".
"These operations, together with strong March data, put upward pressure on CNY rates and yields. Bonds are still likely to outperform swaps as bearish views may be more easily expressed via interest rate swap (IRS)," she said.
China's campaign to shore up slowing growth has seen it roll out fiscal policy measures and pump liquidity into the banking
system.
And a slew of unexpectedly strong economic indicators have prompted some investors to speculate that China's recent round of monetary easing may be drawing to a close.
"It makes sense for the Chinese central bank to refrain from additional easing measures for the time being and to wait and see whether the current policy is sufficient to stabilize the economy," Zhou Hao, senior EM economist for Asia at Commerzbank in Singapore said in a note.
"Further reductions in the minimum reserve requirement ratio (RRR) are therefore unlikely for the time being." At midday, the global dollar index fell to 96.95 from the previous close of 97.043.
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