China's yuan strengthens on pre-holiday demand even as dollar firms

SHANGHAI: China's yuan edged up against the US dollar on Tuesday on demand for cash ahead of next month's Lunar New Year holiday, even as expectations for huge fiscal stimulus in the United States pushed yields higher and supported the greenback.

"In the near term the dollar-yuan pair will tend to be rangebound.

We need to keep an eye on the flow situation. Recently when the dollar-yuan has rebounded we've seen some dollar selling," said a trader at a Chinese bank.

A second trader at a Chinese bank said there was considerable demand for yuan before the week-long Spring Festival holiday, which begins on Feb. 11, which would limit the yuan's reversal.

Before the market open, the People's Bank of China set the midpoint of the yuan's daily trading band at 6.4823 per dollar, its weakest in a week.

Onshore spot yuan opened at 6.4770 per dollar and was changing hands at 6.4712 at midday, 81 pips stronger than the previous late session close. The offshore yuan firmed to 6.4695 per dollar.

Broader yuan gains were capped by a more robust dollar. The dollar index stood at 90.560 on Tuesday, up 0.1% for the day and 1.5% higher than a nearly three-year low touched last week.

President-elect Joe Biden, who takes office on Jan. 20 with his Democratic party in control of both houses of Congress, has promised "trillions" in extra pandemic-relief spending, boosting hopes for a recovery in the world's largest economy.

The promise helped to push US yields even higher after the benchmark 10-year yield rose above 1% last week for the first time since March. It stood at 1.1495% on Tuesday.

Ming Ming, an analyst at CITIC Securities, said if the rise in US rates on the fiscal boost expectations is accompanied by a global rebound, the spread between Chinese and US rates is more likely to remain wide, which should support the yuan.

"But considering that a fundamental recovery of the US economy has not yet appeared, the epidemic is continuing overseas and facing uncertainty domestically, there may not be a coordinated global recovery," he said.

"In this situation, the impact of a rising dollar and US yields is more likely to be seen in the weakening of emerging market country's exchange rates, affecting the performance of risk assets...and narrowing the China-US spread."