Yuan breaches key threshold, edges up to month high

SHANGHAI: China's yuan strengthened past a key threshold to the firmest in a month on Tuesday, underpinned by broad dollar weakness following a dip in US bond yields.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at a near one-month high of 6.5103 per dollar, 130 pips or 0.2% firmer than the previous fix of 6.5233.

In the spot market, onshore yuan opened at 6.5020 per dollar, rose past the psychologically important 6.5 per dollar level to a high of 6.4918, the strongest since March 18. By midday, it was changing hands at 6.4959, 151 pips firmer than the previous late session close.

Its offshore counterpart also strengthened past the key level to trade at 6.491 per dollar at midday.

Traders said the yuan's strength was reflecting broad dollar weakness, and was likely to consolidate around 6.5 per dollar.

"We expect USD/CNY to enter a period of consolidation following the stabilisation of US Treasury bond yields and the USD," Becky Liu, head of China macro strategy at Standard Chartered, said in a note.

Liu added the yuan's fundamentals remained strong but its advantage over other developed economy currencies had narrowed. More channels for capital outflows and a pick-up in dividend payments could reduce inflows into China and limit upside potential for the Chinese currency in the near term.

The bank revised down its yuan forecasts to 6.5/dollar at the end of Q2, 6.6 at end of Q3 and 6.58 at the year-end, compared with 6.3, 6.4, 6.45, respectively, in previous estimates.

Investors continue to gauge US-China policy divergence, pace of domestic vaccine rollouts, global economic trends and the yield gap between China and other major countries, for clues on the yuan's outlook.

On Tuesday, the market took in stride no change to the benchmark lending rate for corporate and household loans. China kept the loan prime rate steady for the 12th straight month at its April fixing, matching market expectations.

"With the economy doing well, policymakers are now focused on tackling financial risks.

But political constraints mean that these efforts are unlikely to include policy rate hikes," said Julian Evans-Pritchard, senior China economist at Capital Economics, who does not expect any change to policy rates in the coming months.

As of midday, the global dollar index fell to 90.904 from the previous close of 91.049.