Yuan bounces off 2-1/2-month low, still set for 6th straight weekly loss

SHANGHAI: China's yuan rebounded on Friday from a 2-1/2-month low struck in the previous session, when the Cabinet flagged possible cuts to banks' reserve requirements, but the Chinese currency was still set for the sixth straight weekly loss.

The overriding factor on Friday was broad weakness in the US dollar, which eased from a three-month high against a basket of currencies due to investors fear that the spread of COVID variants will dampen global economic recovery.

Those worries have increased the demand for safe havens, such as Japanese yen and Swiss franc.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4755 per dollar, 50 pips or 0.08% weaker than the previous fix of 6.4705.

China's yuan weakens as cabinet floats RRR cuts

In the spot market, the onshore yuan bounced from a 2-1/2 month low of 6.4913 per dollar hit on Thursday. It was changing hands at 6.4836 at midday, 74 pips firmer than the previous late session close.

If the yuan finishes the late night session at the midday level, it would have lost 0.18% to the dollar for the week, and post its sixth losing week in a row.

A trader at a Chinese bank said the yuan's broad trend should continue tracking the dollar's movements, while a recent cabinet's talk of RRR cuts prompted market worries over China's economic fundamentals.

Lowering RRR would pump additional liquidity into the financial system, which should theoretically weigh on the currency, said another trader at a Chinese bank.

The State Council, the cabinet, said on late Wednesday that China would use timely cuts in the bank's RRR to support the real economy, especially small firms.

Louis Kuijs, head of Asia economics at Oxford Economics, said the possible RRR cuts should not indicate a broader shift towards monetary policy easing.

"The recent economic slowdown was caused largely by new COVID-19 related restrictions and supply chain hiccups ... Monetary easing won't help much in such circumstances, and the downward pressures should be temporary," he said in a note.

"Indeed, we don't think the outlook for H2 warrants a significantly easier monetary stance," Kuijs added, expecting economic momentum to pick up in the remainder of the year to reach full year GDP growth of 8.4%.

Following the cabinet's dovish comments, the market largely shrugged off China's June inflation data, which showed that factory gate prices rose at a slightly slower pace.

By midday, the global dollar index stood at 92.429, while the offshore yuan was trading at 6.4894 per dollar.