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Markets

China's yuan edges up but COVID spread limits gains

  • The narrative for further CNY gains remains intact," he said in a note.
Published January 25, 2021

SHANGHAI: China's yuan nudged higher against the US dollar on Monday, but its moves were constrained against a backdrop of festering investor concerns over the spread of the novel coronavirus and higher Sino-US tensions over Taiwan.

Analysts and traders say the Chinese currency continues to be supported by structural factors including attractive yield premiums on Chinese debt and the continued recovery of the world's second-largest economy from COVID-19 lockdowns last year.

But China's worst wave of new infections since March 2020 and persistent Sino-US tensions are weighing on the unit.

The country on Monday reported a climb in new COVID-19 cases driven by a spike in infections among previously symptomless patients in northeastern Jilin province.

"Recently the domestic pandemic has seen wider spread, which is hitting market sentiment," said a trader at a Chinese bank. "The yuan is likely to remain range-bound before the Lunar New Year. Keep an eye on moves in the dollar."

Adding to worries, tensions between Beijing and Washington have been rising only days into the new administration of US President Joe Biden over flights by mainland Chinese bombers and fighters into Taiwan's air defence identification zone.

Before the market open on Monday, the People's Bank of China set the midpoint of the yuan's daily trading band at 6.4819 per dollar, weaker than the previous fix of 6.4617.

Under the influence of the weaker fixing, spot yuan opened slightly weaker at 6.4880 per dollar, but quickly turned higher.

By midday, the currency was changing hands at 6.4763 per dollar, 67 pips or about 0.1% stronger than the previous late session.

The offshore yuan firmed to 6.4852 from a close of 6.4974 as the global dollar index fell to 90.161 from the previous close of 90.229.

Stephen Innes, chief global markets strategist at Axi, said that Chinese investors buying Hong Kong-listed shares through the southbound leg of China's Stock Connect programme had slowed the pace of yuan appreciation, but that this provided an investment opportunity.

"Between July and October last year, persistent strong southbound flows did little to halt the steady decline of USDCNY. The narrative for further CNY gains remains intact," he said in a note.

Offshore one-year non-deliverable forwards contracts (NDFs), watched as a gauge of market expectations for the yuan, traded at 6.6233.

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