Yuan inches higher on PBOC's prudent stance and strong holiday sales

SHANGHAI: China's yuan inched higher against the dollar on the first trading day after the week-long Lunar New Year holiday, supported by the central bank's persistently prudent policy stance and strong holiday retail sales data.

The People's Bank of China (PBOC) rolled over maturing medium-term loans earlier on Thursday, but drained 260 billion yuan ($40.31 billion) worth of short-term liquidity as a result of maturing reverse repos on the day.

Traders and analysts said the move suggested that the central bank was keen to keep liquidity balanced with a tightening bias for the time being, and such cash conditions supported the exchange rate and swap curve.

Some short-term money rates hit six-year highs before the long holiday as the PBOC refrained from making heavier liquidity injections, prompting some speculation that a shift to a tighter monetary policy stance may be underway.

Prior to the market open, the PBOC set the midpoint rate at 6.4536 per dollar, 145 pips or 0.22% weaker than the previous fix of 6.4391.

In the spot market, the onshore yuan opened at 6.4500 per dollar and was changing hands at 6.4507 at midday, 69 pips firmer than the previous late session close on Feb. 10.

Trading was generally tepid on the first day when the onshore market returned from the holiday, with volume shrinking to $10.8 billion by midday, down from a normal half-day volume of about $15 billion.

Separately, buoyant retail sales during the holiday underpinned sentiment, traders said. Official data showed that China's retail and catering sectors enjoyed a bumper Lunar New Year holiday week, with revenues rising almost one-third from 2020 levels thanks to strong orders from staycationing consumers.

"The travel restrictions will have dampened the holiday spending, but there appears to have been strong offsetting demand such that the reduction in net spending is less than feared," Daria Parkhomenko, analyst at RBC Capital Markets, said in a note.

By midday, the global dollar index rose to 90.958, while the offshore yuan was trading at 6.4388 per dollar.