China's yuan kept in check by weaker midpoint guidance, eyes on PBOC

SHANGHAI: China's yuan was little changed on Wednesday and pinned in a narrow trading range, after the central bank guided the currency lower amid continued speculation over how much more appreciation authorities will tolerate.

The yuan is at 3-year highs. It has risen about 1.4% percent in the past four weeks and clocked its best monthly performance in May since last November.

The People's Bank of China set the midpoint rate at 6.3773 per dollar prior to market open, 201 pips weaker than the previous fix of 6.3572.

The spot market opened at 6.3805 per dollar and was changing hands at 6.3825 at midday, unchanged from the previous late session close.

The offshore yuan was trading at 6.3825 per dollar.

"We expect the Chinese yuan is likely to remain well-supported because of strong export performance, sizeable trade surplus and ongoing capital inflow into Chinese capital markets for both tactical and structural factors," said Chaoping Zhu, global market strategist of J.P. Morgan Asset Management.

"The PBOC may opt to curb appreciation momentum from time to time, but a stronger Chinese yuan has its benefits in keeping imported prices low and encourage international capital into the Chinese markets."

A host of Chinese policymakers have warned market participants recently against betting on one-sided moves in the currency, and the PBOC this week raised reserve ratios on foreign exchange deposits.

"It is possible that they (the PBOC) will have to intervene more heavily in order to get the currency to stabilise and reduce the pace of appreciation. Although the trajectory is clear, I think the issue is they're not comfortable with the speed at which it has appreciated," said Carlos Casanova, senior Asia economist at Union Bancaire Privee in Hong Kong.

A mountain of dollars on deposit in China has grown so large that banks are struggling to loan the currency and traders say it poses a risk to official efforts to control the fast-rising yuan. Market reaction to the latest headlines on Sino-US relations was largely muted.

Chinese Vice Premier Liu He exchanged views with US Treasury Secretary Janet Yellen on issues of mutual "concern", in his second virtual call in a week with top economic and trade officials under the US Biden administration.

The dollar clung to small gains from overnight on Wednesday, edging back from near a five-month trough versus major peers, as a pick up in US manufacturing kept bets alive for a quicker normalisation of Federal Reserve policy.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 97.84, weaker than the previous day's 97.88.

The global dollar index fell to 89.899 from the previous close of 89.906.

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 6.5375, 2.45 percent away from the midpoint.

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