Yuan inches higher, investors eye on Fed outcome

SHANGHAI: China's yuan inched higher against the dollar on Tuesday, with investors cautiously awaiting comments and the outcome from a two-day US Federal Reserve meeting for a steer on rising yields and the outlook for growth.

Comments from the Fed meeting on March 16 and 17 were likely to bring volatility to dollar and other major currencies in both the short- and long-term, traders said.

Many in the markets believe the risk is low for Fed to shift from their accommodative stance despite forecasts of rapid economic growth in the wake of an accelerating COVID-19 vaccine roll-out and a $1.9 trillion pandemic relief package.

Traders said domestic investors were discouraged from betting either side of the Chinese yuan due to uncertainty in the dollar from the Fed meeting, resulting the yuan trading in thin range around the 6.5 per dollar level in morning session.

The onshore spot yuan opened at 6.4950 per dollar and was changing hands at 6.4982 at midday, 24 pips firmer than the previous late session close.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.5029 per dollar, 19 pips weaker than the previous fix of 6.501.

Some market participants said yield gap between China and other developed economies remained wide, despite a pick up in global yields, helping it attract foreign capital inflows.

Capital inflows into China's bond and equity markets were among the key factors supporting the yuan last year.

Analysts at Standard Chartered expected FTSE Russell to affirm the inclusion of China's government bonds in its flagship World Government Bond Index (WGBI) at the final affirmation later this month, which would help draw more foreign buying.

"The CNY is likely to remain supported in Q2 on a further rise in foreign inflows, partly helped by index inclusion, a likely pick-up in economic activity after the Lunar New Year and still-strong exports," they said in a note, expecting WGBI inclusion to lift foreign inflows to $1.3-$1.5 trillion this year.

But the bank maintained their forecast for the yuan to trade at 6.3 by end-June, before reversing to 6.45 by end-2021.

The global dollar index fell to 91.811 by midday, while the offshore yuan was trading at 6.4966 per dollar.