China yuan softer as safe-harbour demand boosts dollar

SHANGHAI: China's yuan weakened on Tuesday as safe-harbour demand for the dollar boosted the greenback and as Brexit worries battered the pound, with Sino-US tensions continuing to weigh on sentiment.

Before the market open, the People's Bank of China (PBOC) set the midpoint rate for the yuan's daily trading band at 6.532 per dollar, its firmest level since June 26, 2018.

Despite the firmer fixing, spot yuan opened weaker at 6.5340 per dollar and was changing hands at 6.5361 at midday, 61 pips softer than Monday's late session close.

"There is a lot of buying supporting the dollar, so there's not much room for the USD/CNY pair to keep falling. We need to watch the progress of Brexit and bipartisan negotiations in the US," said a trader at a Chinese bank.

The yuan has strengthened more than 6.5% against the dollar this year, prompting market speculation that the PBOC might take steps to stabilise the rising yuan.

But sources say policymakers are comfortable with the yuan's rise to 2 1/2-year highs.

Li-Gang Liu, chief China economist at Citi said that he continued to see a strong bias toward yuan appreciation into 2021.

"As the PBOC's policy exit is way ahead of other industrial economies, the already large interest-rate differential will likely remain, and could continue to enlarge next year, which helps attract large and persistent capital inflows and supports continuous RMB appreciation," he said in a note.

In the short term, traders said that the yuan would still be guided by dollar movements, with Sino-US frictions having a negative impact.

The United States on Monday imposed financial sanctions and a travel ban on 14 Chinese officials over their alleged role in Beijing's disqualification last month of elected opposition legislators in Hong Kong.

The move was widely seen as the latest in a recent series of efforts by outgoing President Donald Trump to box president-elect Joe Biden into hardline positions on Beijing, though Chinese Foreign Minister Wang Yi on Sunday assured US executives that Beijing remained committed to the Phase 1 trade deal with the United States.