Yuan jumps to 3-1/2-mth high, market gauges central bank tolerance

SHANGHAI: China's yuan jumped to a 3-1/2-month high against the dollar on Monday, underpinned by broad dollar weakness, as investors continued to assess the implications for monetary policy of a disappointing US employment report.

The currency's strength is fuelling speculation the central bank may step in via state banks to cool its rapid ascent, traders said.

Prior to market opening, the People's Bank of China (PBOC) lifted the midpoint rate by the most since early January to 6.4425 per dollar, 253 pips firmer than the previous fix of 6.4678.

Monday's guidance, the strongest since Feb. 10, was largely in line with their forecasts, according to analysts and traders.

In the spot market, the onshore yuan opened at 6.4320 per dollar and rose to a high of 6.4265, the firmest since Jan. 29. By midday, it was changing hands at 6.4295, 13 pips firmer than the previous late session close.

The yuan swung around 6.43 per dollar in morning trade. Several traders said the market refrained from testing new highs to gauge the central bank's position on the sudden gains.

The current spot price is not far from this year's highest level of 6.4245 per dollar hit in January, said a trader at a foreign bank, adding some investors were afraid state-run banks could be directed to step in to rein in the currency's strength.

"It appears that the PBOC holds a cautious view on any resurgent RMB appreciation pressure driven by the new USD sell-off, in particular with the slowing China recovery momentum," said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.

The PBOC has introduced multiple measures in late 2020 and earlier this year to stem the rise of the currency by reducing capital inflows.

Li Liuyang, chief currency analyst at China Merchants Bank, said 6.4 per dollar could be a key resistance for the yuan in the short term.

"At a time when the G10 currencies strengthened across the board, the yuan also faced strong upward pressure," Li said.

"However, considering that emerging market currencies are not all strengthening, in order to maintain the yuan's stability against a basket of currencies, 6.4 could become a strong resistance for the yuan."

By midday, the global dollar index rose to 90.281 from the previous close of 90.147, while the offshore yuan was trading at 6.4248 per dollar.