Yuan set for best week since Nov, regulators signal concerns over one-way bets

SHANGHAI: China's yuan extended gains against the dollar on Friday and looked set for its best weekly performance since November, but the pace of the rally slowed after regulators signaled some concerns over strong one-way bets on the currency.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3858 per dollar, firmer than the previous fix of 6.403.

Friday's official guidance rate was the strongest since May 2018 and set above the psychologically important 6.4 per dollar level.

Traders and analysts saw the move as a nod from the authorities that they would allow spot yuan to trade between the 6.3 and 6.4 levels for the time being.

In the spot market, onshore yuan opened at 6.3839 per dollar and was changing hands at 6.3705 at midday, 135 pips firmer than the previous late session close and putting it on track for a sixth straight day of gains.

"The imminent RMB appreciation risk may drive more RMB buying flow and push the USD/RMB lower in the near term, while the downside of USD/RMB will be supported by the dividend flow offered by Chinese corporate and the potential USD rebound due to the Fed's hawkish shift," Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said in a note.

Traders said most investors still expect further strength in the yuan, but its rally slowed in morning trade after regulators warned against "one-way expectations" on the exchange rate.

Chinese regulators said late on Thursday that they will crack down on manipulation of the forex market while reiterating no change to the country's currency policy. The remarks were the second time in five days that officials commented on currency policy.

"The central bank is committed to a flexible exchange rate and hence will not draw a line in the sand in both directions," said Wang Ju, senior FX strategist at HSBC in Hong Kong.

"It aims for less exchange rate control over time, as the capital account liberalises further, but there is still a 'basically stable' policy target under the current set-up," she added, expecting more two-way volatility in the yuan this year.

Alvin Tan, Asia FX strategist at Royal Bank of Canada in Hong Kong, said Beijing may be "expected to continue leaning against yuan strength", with such an investor outlook seen in a rebound in options market.

The global dollar index rose to 90.066 at midday from the previous close of 90.012, while the offshore yuan was trading at 6.364 per dollar.