Yuan up on tight liquidity, set for worst month since August 2019

SHANGHAI: China's yuan edged up on Wednesday underpinned by tighter cash conditions, but a rebound in the US dollar has set the currency on course for its biggest monthly drop since August 2019.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4601 per dollar, 34 pips weaker than the previous fix of 6.4567.

In the spot market, onshore yuan opened at 6.4625 per dollar and was changing hands at 6.4571 at midday, 69 pips firmer than the previous late session close.

If the yuan finishes the late night session at the midday level, it would have lost 1.33% to the dollar for the month, snapping two months of gains and posting the worst monthly performance since August 2019.

Some traders said onshore and offshore yuan liquidity showed signs of tension on Wednesday morning, as seen from rises in short-term borrowing costs. Banks have to shore up cash for month-end demand and certain administrative requirements. Such tightness supported the yuan.

The CNH Hong Kong Interbank Offered Rate benchmark (CNH HIBOR) for overnight tenor jumped to 9.741%, the highest since June 1, 2017, while in the onshore interbank market, the overnight repo surged to a high of 4% in morning trade, the firmest since Feb.1.

Meanwhile, temporarily closures of some major state-run banks in Beijing ahead of 100th anniversary celebrations of the Chinese Communist Party on July 1 had thinned trade volumes and liquidity, traders said, amplifying market volatility.

A trader at a Chinese bank said investors were unwilling to take large bets partly due to the celebrations, along with concerns over a major US job report due on Friday that could affect the Federal Reserve's policy projections.

Separately, some analysts expect more two-way volatility in the yuan in the second half of the year against the backdrop of an uneven domestic economic recovery.

"The issue of uneven domestic recovery may persist in the next few quarters," said Marco Sun, chief financial market analyst at MUFG Bank, expecting the yuan to trade between 6.44 and 6.48 per dollar in the near term.

Recent data also showed a moderation in China's economic recovery in June. Factory activity dipped to a four-month low in June on higher raw material costs, a shortage of semiconductors and a COVID-19 outbreak in Guangdong.

By midday, the global dollar index fell to 92.041 from the previous close of 92.066, while the offshore yuan was trading at 6.4622 per dollar.