Yuan inches higher, market looks to PBOC for hints on further gains

SHANGHAI: China's yuan inched higher on Friday and looked set for a marginal weekly gain against a weaker dollar as investor concerns about tapering talk by the US Federal Reserve eased.

The dollar jumped briefly early in the week after minutes of the last Fed meeting showed some officials appeared ready to consider changes to monetary policy based on a continued strong economic recovery.

But it soon weakened again on views that any tightening is still a long way off.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.43 per dollar, 164 pips or 0.26% firmer than the previous fix of 6.4464.

In the spot market, onshore yuan opened at 6.4337 per dollar and was changing hands at 6.4342 at midday, 13 pips firmer than the previous late session close.

Despite slight gains in the yuan on Friday, many traders and analysts it will continue to trade below the 6.4 per dollar level for the time being.

"The PBOC has been setting USD/CNY fixing with an upward bias in the past sessions to ease market expectations for the yuan's appreciation amid broad dollar weakness," said Gao Qi, FX strategist at Scotiabank in Singapore.

He expected the yuan to trade between 6.40 and 6.50 per dollar in the near term, with the trade-weighted yuan basket index to stay in a range of 96.0-97.5.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, said market participants were anxiously awaiting policy signals from the PBOC on whether it will allow further yuan strength.

"A CNY fixing setting below 6.4 will be a confirmation," Cheung said.

"We reckon that the PBOC may turn more cautious on the RMB appreciation pace and the related growth risk, when the RMB basket index climbed to a 3-year high alongside weakening (economic) growth momentum."

The CFETS yuan basket index, a gauge that measures the yuan strength against its major trading partners, stood at 97.2 on Friday, according to Reuters' calculations based on official data, up 2.49% so far this year.

China's FX trading platform publishes the CFETS index on a weekly and monthly basis.