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Markets

Yuan off lows on upbeat PMI data, but set for worst month since Aug 2019

  • The PBOC has kept rolling over 10 billion yuan worth of maturing reverse repos, resulting in zero net cash injection for 23 straight trading days, which included Wednesday - the last trading day of the month.
31 Mar 2021

SHANGHAI: China's yuan bounced from a four-month low against the dollar on Wednesday as strong economic data helped stabilise market sentiment, but the local currency remained on course for its biggest monthly weakening since August 2019.

The yuan has been under pressure recently amid a buoyant dollar, which has benefited from rising Treasury yields and signs of a quick US economic recovery.

On the day, however, the Chinese currency got some respite from an official survey showing activity in the nation's vast manufacturing sector expanded at the quickest pace in three months.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at a fresh four-month low of 6.5713 per dollar, 72 pips or 0.11% weaker than the previous fix of 6.5641.

In the spot market, the onshore yuan opened at 6.5660 per dollar and was changing hands at 6.5633 at midday, 91 pips firmer than the previous late session close. It recovered from a low of 6.5799 hit on Tuesday, the weakest since Dec. 1, 2020.

Overall, however, if the yuan finishes the late night session at the midday level, it would have lost about 1.5% against the dollar in March, marking the worst monthly performance since August 2019.

The rapid coronavirus vaccine rollout has strengthened recovery prospects in the world's largest economy, keeping dollar bulls in control and weighing on many other currencies including the yuan.

Analysts at China Construction Bank said in a note that over the longer run, "the yuan exchange rate does not have the basis for substantial depreciation" even though weakness will likely persist in coming months.

"The current market is digesting the factors of the US economic recovery after the epidemic," they said, expecting the local currency to trade in a range of 6.50 to 6.63 per dollar in April.

The upbeat economic data stoked market concern over possible tightening, but some traders and analysts said Beijing will likely continue to stick with its pledge of not making a U-turn on its policy stance for the time being.

"The central bank's neutral stance on liquidity has likely eased concerns over potential sharp tightening," said Stephen Innes, chief global markets strategist at Axi.

"The market is now reading this open market operations pattern as a signal that the onshore liquidity will remain stable for some time. However as April approaches, onshore liquidity may tighten as economic data continues to improve, tax payment picks up and rates bond issuance rises significantly."

The PBOC has kept rolling over 10 billion yuan worth of maturing reverse repos, resulting in zero net cash injection for 23 straight trading days, which included Wednesday - the last trading day of the month.

The global dollar index rose to 93.405 at midday, while the offshore yuan was trading at 6.5727 per dollar.

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