China's yuan weakens, state banks seen buying dollars ahead of Lunar New Year

SHANGHAI: The yuan weakened against a broadly stronger dollar on Wednesday, as state banks bought the greenback and yuan liquidity improved ahead of the Lunar New Year holiday, which begins on Feb. 11.

"State banks are buying dollars to offset heavier seasonal corporate dollar selling ahead of the holiday. That's why the yuan is sticking to 6.46 per dollar this week, no matter how the dollar index moves," said a trader at a Chinese bank.

"But it is hard to explain why they are buying at 6.46."

Before the market open, the People's Bank of China (PBOC) set midpoint of the yuan's daily trading band at 6.4669 per dollar, firmer than the previous fix of 6.4736.

Spot yuan opened at 6.4545 per dollar and softened to 6.4596 at midday, 30 pips weaker than Tuesday's late session close.

The offshore yuan eased to 6.463 per dollar from a close of 6.4595 Tuesday.

A private sector survey released on Wednesday showed China's country's services sector grew at its slowest pace in nine months in January.

Despite slower growth, the People's Bank of China (PBOC) has refrained this year from making substantial liquidity injections before the Lunar New Year holiday, which some analysts interpret as an attempt to limit financial risks. That has helped to drive interbank rates to multi-year highs in recent days, lifting the yuan.

But rates eased after the PBOC made a large injection on Tuesday, and were lower still on Wednesday despite a small drain.

The one-week Shanghai Interbank Offered Rate (SHIBOR) fell to 2.146% on Wednesday, its lowest since Jan. 15.

"We expect the PBOC to ease the tight liquidity situation in the next couple of weeks and interbank rates to return to more desirable levels," Nomura analysts said in a note.

The yuan was also pressured by a broadly firmer dollar, after Democratic lawmakers in the US Congress moved toward advancing President Joe Biden's proposed $1.9 trillion coronavirus aid plan without Republican support.

The global dollar index was at 91.05, having touched a two-month high of 91.283 in the previous session.