China's yuan firms as dollar slips

SHANGHAI: China's yuan firmed on Wednesday, but traded in a narrow range, after the central bank guided the currency higher and on the back of a weaker dollar.

The People's Bank of China set the midpoint rate at 6.5046 per dollar prior to the market open, 57 pips firmer than the previous fix of 6.5103 and strongest such guidance since March 23.

In the spot market, the yuan opened at 6.5022 per dollar and was changing hands at 6.4990 at midday, 19 pips firmer than the previous late session close.

The offshore yuan was trading at 6.4984 per dollar.

Traders said the yuan would remain rangebound around the 6.5 level for the short term, as the dollar index climbed back above 91 as rising worries over coronavirus outbreak in Japan and India increased safe haven demand for the greenback.

They also said the halt of a quick rise in US treasury yields would lead to the return of reflation trade, which could put pressure on the dollar for the time being.

The dollar languished on Wednesday, hovering just above a seven-week low with subdued US bond yields reducing the currency's yield appeal.

The dollar index, which tracks the US currency against six major peers, was at 91.196 early in the Asian trading day after slumping as low as 90.856 on Tuesday for the first time since March 3. It has declined 2.2% so far this month.

"The yuan would passively appreciate given the weakness in the dollar for the short term," said a trader at a foreign bank.

The onshore yuan could strengthen to 6.45 if the dollar index declines to around 90, Li Liuyang, chief forex analyst at the financial market department of China Merchants Bank, said in a report.

Li noted the yuan rise would slow down when it's back to 6.45, as the trend of the dollar and China's economic fundamentals do not support a continued appreciation trend in the Chinese currency.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.69, firmer than the previous day's 96.56.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.6741, 2.54 percent away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.