Yuan inches higher on dollar weakness, year-end cash demand

SHANGHAI: The yuan inched higher on Tuesday as the dollar slipped to a near 2-1/2-year low against major peers after US lawmakers pushed forward with a COVID-19 relief package and amid high year-end demand for cash.

The House of Representatives voted on Monday to increase stimulus payments to qualified Americans to $2,000 from $600, sending the measure on to the Senate for a vote. That reduced demand for safe-haven assets like the dollar.

Yuan dealers said the local unit was tracking the dollar's movements during holiday-thinned trade, which was likely to continue for the rest of the year, as domestic investors refrained from making huge bets amid low liquidity.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.5451 per dollar, 215 pips weaker, or 0.33%, than the previous fix of 6.5236.

In the spot market, the onshore yuan opened at 6.5373 per dollar and was changing hands at 6.5318 at midday, 65 pips firmer than the previous late session close.

Markets widely expect the dollar to maintain its weakening trend in 2021, and such softness could be supportive of the yuan.

"Through the lens of US asset market outperformance, a consensus view into 2021 is that the US dollar is overvalued after a long stretch of American exceptionalism," Stephen Innes, chief global market strategist at Axi, said in a note.

"The Fed rate cuts have eroded the US dollar carry advantage, while their new average inflation targeting framework should keep interest rates low for several years."

The weaker dollar, the widening yield gap between China and the United States and effective coronavirus containment have underpinned the yuan to rebound about 10% against the dollar since late May.

For the year, the yuan was set to book its first annual gain in three.

Separately, higher seasonal cash demand also lent support for the yuan in recent sessions, as banks were setting aside more cash for year-end administrative checks, households were withdrawing cash for holiday spending and companies requiring more funds for various payments.

Foreign exchange forward curves moved upward as a result of higher demand for the yuan. Spot-next contract for dollar/yuan jumped to 70 points on Tuesday morning, the highest since late September.

The one-year contract also rose to a three-week high of 1,580 points.

The global dollar index fell to 90.097 at midday, when the offshore yuan was trading at 6.5206 per dollar.