Yuan edges up on demand, dampened rate cut expectations

SHANGHAI: China's yuan inched higher against the dollar on Tuesday, as strength in the greenback was offset by stronger demand for the Chinese currency and as rate cut expectations eased.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at a fresh two-week low of 6.4842 per dollar, 2 pips weaker than the previous fix of 6.4840.

In the spot market, onshore yuan opened at 6.4830 per dollar and was changing hands at 6.4802 at midday, 60 pips firmer than the previous late session close.

China's yuan eases to 1-week low to reflect dollar rebound

The spot price continued trading sideways, swinging in a tight range of about 70 pips on Tuesday morning, with several traders attributing the slightly stronger yuan to profit-taking orders on long dollar positions from some corporate clients and banks' proprietary accounts.

The dollar was buoyant as a run of strong US job figures solidified expectations the US Federal Reserve could soon start tapering its massive coronavirus-driven stimulus.

Tommy Xie, head of Greater China research at OCBC Bank in Singapore, said the yuan's relative stability against a rising dollar has sent its value higher against a basket of currencies of its trading partners.

"With regulation induced idiosyncratic risk wanes, RMB is likely to be the function of dollar movement in the near term," Xie said in a note, referring to the recent regulatory crackdown on China's tech sector.

The yuan basket index has persistently traded above 98, a level once considered the ceiling for the index, and touched 98.58 on Tuesday, the highest since July 26, according to Reuters calculations based on official data.

Some traders said spot yuan also gained support as expectations for more aggressive monetary policy easing, including possible interest rate cuts in the near term, were dampened after the PBOC highlighted policy stability in its second quarter monetary policy report.

The PBOC cited a rebound in COVID-19 cases globally and the risk from expected policy shifts in developed countries that could affect cross-border capital flows.

Monetary easing usually piles downside pressure on the currency in the short term.

Many analysts said the interest rate cut was an adjustment to monetary policy objectives, which was inconsistent with the policy tone, hence chances of such a move were very low.

"In general, the report suggested that current inflation has caught the central bank's attention. Unless it is clearly mentioned by the State Council, the window for rate cuts in the second half of the year may have been closed," said Ming Ming, head of fixed income at Citic Securities.

In global markets, the dollar index stood at 92.964 as of midday, while the offshore yuan was trading at 6.483 per dollar.