Yuan bounces from 1-week low, investors eye stock risks

SHANGHAI: China's yuan on Tuesday rebounded from a one-week low hit a day earlier, although investors were still keeping a close eye on the possible spillover effects of a mainland stock selloff on currency markets.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4734 per dollar, 29 pips firmer than the previous fix of 6.4763.

In the spot market, the onshore yuan bounced from a one-week low of 6.4877 per dollar hit a day earlier and traded at 6.4760 by midday, 65 pips firmer than the previous late session close.

Despite a marginal bounce from Monday's lows, traders said market sentiment remained rather weak as investors continued to gauge potential capital outflow risks amid a powerful regulatory crackdown on some sectors.

Yuan nears 1-week low

"The rise in regulatory risk in China has led to equity sell-offs, but its impact on the RMB has been relatively limited thus far," strategists at OCBC Bank in Singapore said in a note.

"Northbound inflow momentum has been fading, but a deeper outflow situation may need to be observed for the RMB to be impinged. Nevertheless, it should still enter as a RMB-negative at the margins. This supports our near-term RMB pessimism."

Meanwhile, the yuan's stubborn strength against its major trading partners prompted some market analysts to revise their outlook for the Chinese currency and trim bets on further rises.

The yuan basket index has persistently traded above 98, a level once considered the ceiling for the index, and is up about 4% so far this year, whereas the local unit only gained 0.8% against the dollar.

"There will be a limit to how far the yuan can appreciate given that the CFETS RMB Index is already at the top of its trading range," said Khoon Goh, head of Asia research at ANZ.

"Hence, in an environment when the USD turns lower, the yuan is likely to underperform the basket," he said.

Goh has revised his year-end forecast for the yuan to 6.40 from 6.30 previously and expects it to trade in a 6.40 to 6.50 range for the rest of the year.

Separately, much of the focus has shifted to the Fed's two-day policy meeting that ends on Wednesday.

Investors would pay close attention to comments on the timing of stimulus tapering.

By midday, the global dollar index fell to 92.589 from the previous close of 92.606, while the offshore yuan was trading at 6.479 per dollar.