SHANGHAI: China's yuan firmed to a 7-week high on Wednesday as a raft of stronger-than-expected data suggested the slowing economy may be starting to stabilise.
The onshore yuan ended domestic trade up 0.4 percent at 6.6858 per dollar at 0830 GMT, its strongest close since Feb.27 and 270 pips stronger than the previous late session close.
Early in the day China reported gross domestic product (GDP) grew at a steady 6.4 percent pace in the first-quarter from a year earlier, defying expectations for a slightly slowdown. March industrial output and retail sales also grew more than forecast, while investment picked up as expected.
But analysts warned it is too early to call a sustainable turnaround, and said continued policy support is needed to maintain momentum in the world's second-largest economy.
The resilient GDP reading was the key factor pushing the yuan higher, said a trader at a foreign bank in offshore market, while adding that liquidity tightness also played a role.
"Onshore yuan was tracking its offshore counterpart, and institutions were building long yuan positions," said a trader at a Chinese bank.
The offshore yuan was trading at 6.6825 per dollar as of 0830 GMT, also up 0.4 percent from with its previous close of 6.7120.
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 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.
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.
The central bank unexpectedly drained a net 6.5 billion yuan ($971.83 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.
The volume-weighted average rate of the benchmark overnight repo traded in the interbank market, considered one of the best indicators of general liquidity in China, was 2.98 percent on Wednesday afternoon, the highest since April 2015.
China's campaign to shore up slowing growth has seen it roll out fiscal policy measures and pump liquidity into the banking system.
But a recent series of unexpectedly strong economic indicators, most notably robust credit data, have prompted some investors to speculate whether 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."
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