Yuan inches up despite weaker-than-expected midpoint guidance

SHANGHAI: The yuan inched higher against the dollar on Wednesday as tighter cash conditions offset a weaker-than-expected official guidance rate, which some traders felt signaled authorities' unease over the Chinese currency's strength.

Moves were limited, however, as investors anxiously awaited the minutes from the Federal Reserve's latest meeting for more clues on the dollar's outlook.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4762 per dollar, 149 pips or 0.23% weaker than the previous fix of 6.4613.

Traders and analysts said the official midpoint came in much weaker than their projections, and it was 54 pips softer than Reuters' estimate of 6.4708 per dollar.

Some market participants speculated that the much weakened guidance could curb the fast gains in yuan's value against a basket of currencies. The basket index has persistently hovered around the 98 level and is not far from its three-year high.

In the spot market, onshore yuan opened at 6.4778 per dollar and was changing hands at 6.4716 at midday, 72 pips firmer than the previous late session close.

Despite the weaker midpoint, the yuan gained support from signs of tightness in the interbank markets, according to several currency traders.

The PBOC has maintained its prudent stance by offering zero liquidity injection on a net basis via open market operations, but an additional 70 billion yuan ($10.82 billion) worth of cash deposits were set to expire on Wednesday, draining cash from the banking system.

Strategists at OCBC Bank expected onshore liquidity may be "on the tight side near-term", while higher local government bond issuance could also weigh on liquidity conditions.

Higher domestic rates and falling US yields have pushed the interest rate gap between China's 10-year government bonds and their US counterparts to the widest level since March.

A wider yield gap usually attracts capital inflows that support the yuan.

However, the yuan remained stuck in a thin range against the dollar since an unexpected hawkish tilt from the Fed's June policy meeting.

Marco Sun, chief financial market analyst at MUFG Bank, said that showed the market was "waiting for a signal that could be used to determine that the PBOC would adjust its monetary policy".

Sun expected the yuan to trade in a range of 6.45 to 6.48 per dollar in the near term.

The Fed minutes due later in the session could offer more insights into US policymakers' thinking over a timeframe for paring back stimulus.

By midday, the global dollar index stood at 92.529, while the offshore yuan was trading at 6.4735 per dollar.