Yuan advances to 1 week high on capital inflows, basket index highest since 2016

SHANGHAI: China's yuan advanced to a one-week high against a slightly weaker dollar on Thursday, underpinned by foreign capital inflows against the backdrop of a recovery in risk appetite in global markets.

The spot market opened at 6.4686 per dollar and rose to a high of 6.4653, the strongest level since July 16. By midday, it was changing hands at 6.4664, 21 pips firmer than the previous late session close.

Currency traders said heavy corporate dollar selling in favour of the yuan and recent foreign fund inflows into mainland financial markets supported the Chinese yuan, as Thursday marked the fourth straight day the A-share market saw net inflows via the Stock Connect scheme.

China's yuan weakens as central bank notches eighth straight softer fixing

"Regarding the asset diversification, the People's Bank of China (PBOC) managed to adopt its independent monetary policy cycle on the basis of local economy development, rather than depending on the Federal Reserve's policy akin to other EM Asian currencies," said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.

"Such low correlations with (the) Fed's policy should offer diversification benefits in the portfolio management for the overall returns enhancement."

Prior to market opening, the PBOC set the midpoint rate at a one-week high of 6.4651 per dollar, 184 pips or 0.28%, stronger than the previous fix of 6.4835.

The strengthened official guidance rate has pushed China's trade-weighted yuan basket index, as measured by the China Foreign Exchange Trade System (CFETS), to 98.77, the highest since March 15, 2016, up 4.15% so far this year, according to Reuters' calculations based on official data.

Markets debated whether a strong basket index could undermine China's export competitiveness and prompt policymakers to change the country's FX policy to rein in the yuan's strength.

The 98 level used to be considered as the ceiling for the CFETS index, but some traders and analysts said they were not too worried this time as exports remained resilient given China's relative success in containing the pandemic.

A chief dealer at a Chinese bank said he expected the index to test 99 to 101 in the near-term.

"It also depends on the dollar index's performance in the medium term," he said.

"Generally speaking, a weaker dollar is conducive to a stronger yuan index, and a stronger greenback could translate to a weaker yuan index."

By midday, the global dollar index fell to 92.773 from the previous close of 92.803, while the offshore yuan was trading at 6.4685 per dollar.