China's yuan weakens as cabinet floats RRR cuts

SHANGHAI: The yuan weakened on Thursday as the dollar traded near its highest levels in three months and after China's cabinet floated the possibility of cuts to banks' reserve requirements to support economic growth.

While the cabinet said China would keep monetary policy stable, investors took talk of cuts in RRR - the mandatory reserves that banks have to set aside - as a strong easing signal ahead of June economic data next week that is expected to show a further softening of momentum.

Yuan rebounds from week low, strength vs FX basket keeps gains in check

The policy comments added to a bearish tone for the yuan. Chinese government bond futures soared and the benchmark Chinese 10-year yield fell to its lowest level since August.

"The PBOC's dovish shift may hint (at) softening growth momentum for China economy in the rest of this year," Ken Cheung, chief Asian FX strategist at Mizuho Bank said in a note.

The yuan dipped around 0.1% against the dollar by midday, with the greenback supported by the Federal Reserve's June policy meeting minutes which showed the Fed could begin to taper asset purchases as soon as this year.

Various participants at the Fed meeting said they felt conditions for curbing bond-buying would be "met somewhat earlier than they had anticipated," though others saw a less clear signal from incoming data, the minutes showed.

Before the market open, People's Bank of China set the yuan's daily midpoint rate at 6.4705 per dollar, firmer than the previous fix of 6.4762.

Spot yuan opened at 6.4762 per dollar and was changing hands at 6.4783 at midday, 71 pips weaker than Wednesday's late session close.

The offshore yuan weakened to 6.4841 per dollar from a close of 6.4753, but the Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 98.24, unchanged on the day.

Expectations of easing in China and tightening in the US pushed spreads between the two countries' 10-year sovereign yields tighter on Thursday after they had widening to a four-month high earlier this week.

The global dollar index rose to 92.752 from the previous close of 92.714.

"In the near term we continue to expect the US dollar to strengthen, but the yuan is still rangebound overall," said a trader at a foreign bank.