China's yuan edges higher, all eyes on FOMC meeting

SHANGHAI: China's onshore yuan inched higher against the US dollar on Wednesday after the central bank set a slightly firmer daily fixing, but its strength was capped as investors awaited the outcome of a US Federal Reserve policy meeting.

With the US economy picking up steam, investors will be watching for any indications that the Fed could start raising rates earlier than it has previously indicated, which could support a stronger greenback.

Traders said the outcome could prompt more market volatility, though the likelihood of a clear policy shift is low.

"The yuan is probably going to be directionless today. We'll have to wait and see how the market reacts to the Fed's decision and (Fed Chair Jerome) Powell's comments," said a trader at a foreign bank.

Before the open, the People's Bank of China set the midpoint rate of the yuan's daily trading band at 6.4978 per dollar prior, firmer than the previous fix of 6.5029.

Spot yuan opened at 6.5060 per dollar and edged up to 6.5025 around midday, 35 pips firmer than Tuesday's late session close.

The offshore yuan was 10 pips weaker than the previous day's close at 6.5031 per dollar.

Analysts continue to expect the yuan to appreciate this year, though at a slower pace than 2020, when it appreciated 6.7%. Authorities have stepped up efforts to contain the yuan's rise, with the central bank purchasing its most foreign exchange in more than five years in February.

Sources with knowledge of the matter told Reuters on Tuesday that at least one major state-owned bank is conducting large currency swaps in the mainland China market, possibly as part of efforts to rein in the yuan.

Rising tensions between Beijing and Washington could also put a damper on the currency's rise.

US officials said that Washington will take an uncompromising stance in talks with China on Thursday in Alaska, the first face-to-face meetings between US and Chinese senior officials since US President Joe Biden took office.

US Secretary of State Antony Blinken has pledged to push back against Beijing's "coercion and aggression" including some of its territorial claims.