Yuan eases as FX demand for dividend payments kicks in

SHANGHAI: The yuan eased on Wednesday as overseas-listed Chinese firms bought dollars to make dividend payments, but trade was cautious ahead of US inflation data which has raised concerns in equity mrkets about earlier interest rate hikes.

The dollar continued to hover near its lowest levels of the year, however, suggesting most investors are hanging on to bets that the US Federal Reserve would maintain its ultra-easy policy settings for a prolonged period despite an expected pickup in US inflation data later in the day.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4258 per dollar, 4 pips weaker than the previous fix of 6.4254.

The official daily guidance rates largely matched market forecasts or came in slightly weaker-than-expected earlier this week.

But Wednesday's fixing was much firmer than Reuters' forecast and was barely changed from the previous day's fix.

The official guidance was 48 pips stronger than Reuters' prediction of 6.4306.

In the spot market, onshore yuan opened at 6.4283 per dollar and was changing hands at 6.4406 at midday, 123 pips weaker than the previous late session close.

Traders said some expectations that the yuan could strengthen past the 6.40 per dollar level were receding after several attempts failed earlier this week, and some exporters' dollar selling interest to avoid exchange rate loss ebbed.

Instead, corporate clients' demand for the greenback started to pick up as some took advantage of the recent cheaper dollar.

Overseas-listed Chinese companies usually have to make their interim dividend payments between May and August, and such seasonal FX purchases could pile downward pressure on the yuan. Standard Chartered had expected total dividend payments would reach $84 billion this year.

Separately, some investors were relieved after the PBOC appeared to reaffirm that it will keep policy steady and guide real lending rates lower, despite a sharp jump in producer inflation.

"The PBOC's Q1 monetary policy report suggests that the central bank is not worried about imported inflation, despite that it expects PPI to rise further in Q2 and Q3," said Frances Cheung, rates strategist at OCBC Bank in Singapore.

"This may be taken as a reassurance that there is no U-turn in monetary policy. We believe liquidity will stay supportive and front-end rates anchored," she said.

The global dollar index stood at 90.398 as of midday, when the offshore yuan was trading at 6.4385 per dollar.