Yuan edges up, but gains capped by worries over Delta outbreaks

SHANGHAI: The yuan edged up against a weaker US dollar on Wednesday, but gains were capped by investor worries over widening outbreaks of the highly contagious Delta variant in China and their potential impact on economic growth in the second half of the year.

China reported on Wednesday 96 new COVID-19 cases for Aug. 3.

Although the number of cases remained small in absolute terms compared with other economies, the Delta coronavirus variant has been detected in at least a dozen cities, including big ones such as Beijing, Wuhan and Chongqing.

China's yuan hits one-week low as recovery hopes lift dollar

Policy insiders and analysts told Reuters that China was poised to quicken spending on infrastructure projects while the central bank would support with modest easing steps, as risks from the Delta variant and flooding threaten to slow the economic recovery.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4655 per dollar, 45 pips or 0.07% weaker than the previous fix of 6.461.

In the spot market, onshore yuan opened at 6.4652 per dollar and was changing hands at 6.4608 at midday, 92 pips firmer than the previous late session close.

Traders said the slightly firmer yuan was reflecting a falling dollar in overseas market, but the domestic virus outbreaks have triggered risk aversion sentiment in the market.

A trader at a foreign bank said the yuan remained rangebound on Wednesday morning as investors wait for news of specific measures that policymakers would roll out to prop up the economy.

"Notwithstanding the stability in RMB spot, we think the underlying positive drivers for the RMB continue to be undermined," strategists at OCBC Bank said in a note.

"Any market expectations of PBOC rate hikes were replaced with reserve requirement ratio (RRR) cut expectations. These negatives weigh on the RMB at this point, and informs our bias for a higher USD/CNH."

A number of global investment banks including Goldman Sachs, ING, Standard Chartered and Pinpoint Asset Management saw chances for another RRR cut in the remainder of this year.

The PBOC delivered an unexpected broad-based RRR cut in July, with many market analysts and participants interpreting it as a fine-tuning liquidity move.

In the global markets, the dollar was pinned near recent lows against other currencies, as traders awaited US jobs data for a guide to the rates outlook.

The global dollar index fell to 92.002 at midday from the previous close of 92.036, while the offshore yuan was trading at 6.458 per dollar.