Yuan dips below key threshold on rising corporate dollar demand

SHANGHAI: China's yuan dipped against the dollar to just below a key threshold on Monday, weighed by rising corporate demand for the greenback ahead of several major central bank meetings.

The yuan's recent strength has been supported by broad dollar weakness, but any change to the US Federal Reserve's accommodative policy stance could spark market volatility, traders said. US inflation data this week may open the door for the Fed to talk about tapering and lead to a firmer dollar.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3963 per dollar, 109 pips or 0.17% firmer than the previous fix of 6.4072.

In the spot market, onshore yuan opened at 6.3969 per dollar and quickly weakened past the key psychologically important 6.4 level before changing hands at 6.4008 at midday, 58 pips weaker than the previous late session close.

Traders and analysts said yuan expectations were divided after Chinese policymakers repeatedly warned investors against betting on one-sided moves in the currency. The PBOC last week raised the reserve requirement ratio on foreign exchange deposits for the first time in 14 years.

"China's first RRR hike for foreign currency deposits sent a signal that there are enough tools in the central bank's toolbox to curb the RMB's one-way movement expectation even though the PBOC has exited from direct intervention," said Tommy Xie, head of Greater China research at OCBC Bank in Singapore.

Traders added that increasing dollar demand from their corporate clients on Monday morning had added downward pressure on the yuan, despite ample dollar liquidity.

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 expects total dividend payments to reach $84 billion this year.

The market, meanwhile, shrugged off China's May trade data, which showed imports grew at their fastest pace in 10 years, fuelled by surging commodity prices, while export growth missed expectations, likely on disruptions caused by COVID-19 cases at major ports in the country's south.

Policy sources told Reuters China was likely to lean on incremental steps to slow the yuan's gains to deter speculators and help its exporters, shunning drastic measures that could undermine its goal to liberalise the currency and boost the yuan's global clout.

Separately, a former senior official at the foreign exchange regulator advocated the swift introduction of yuan futures trading to improve hedging in a market whose recent trend of yuan appreciation has been shaped by a "herd effect".

By midday, the global dollar index rose to 90.153 from the previous close of 90.142, while the offshore yuan was trading at 6.3975 per dollar.