Yuan inches higher on tighter liquidity conditions

SHANGHAI: China's yuan inched higher against the dollar on Tuesday, underpinned by tighter cash conditions in domestic money markets following a spike in short-term borrowing costs.

Demand for the local unit usually rises in the run-up to the week-long Lunar New Year holiday, which falls in Feb. 11 this year, but the absence of explicit liquidity support from the central bank has caused some signs of stress in the markets.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at a one-week low of 6.4847 per dollar, 28 pips weaker than the previous fix of 6.4819.

In the spot market, the onshore yuan opened at 6.4750 per dollar and was changing hands at 6.4715 at midday, 83 pips firmer than the previous late session close.

Rising demand for the local currency and tighter liquidity in the interbank market led to a spillover effect, driving yuan forwards higher and supporting spot prices, currency traders said.

Onshore yuan forwards rose to the highest level this year.

Benchmark one-year onshore dollar/yuan swap points hit 1,500 points on Tuesday, the highest since Dec. 30, 2020, up from 1,423 points at the previous close.

Market participants and analysts, meanwhile, questioned whether the regulator would start to adopt a tightening bias in its monetary policy stance as some senior central bank officials have recently signalled they may look to wind back some stimulus.

"With China's economic recovery gathering steam, Chinese authorities have signalled that they are considering scaling back on stimulus and curbing high leverage," Stephen Innes, chief global markets strategist at Axi, said in a note.

PBOC Governor Yi Gang said on Monday that China's central bank will adjust to new economic developments in a timely manner, but at the same time look to maintain policy stability to avoid a policy cliff.

The yuan's gains were partly capped as a central bank adviser said China should relax capital outflows measures following sharp gains in the yuan in recent months. Too strong a currency could hurt the country's exporters.

Ma Jun, in a transcript of remarks at a forum in China published on Monday, said the central bank should actively consider relaxing some measures on foreign exchange outflows to alleviate the upwards pressure on the yuan and further efforts to internationalise the currency.

The global dollar index rose to 90.378 at midday, while the offshore yuan was trading at 6.4792 per dollar.