China's yuan eases as geopolitical turmoil hurts fragile sentiment

SHANGHAI: China's yuan edged lower against a firmer dollar on Tuesday, as political tension in Afghanistan hurt already fragile market sentiment.

Signs of economic slowdown in China have piled downside pressure on the yuan this week, and developments in Afghanistan after the Taliban seized the capital Kabul increased risk aversion in global markets to lift the dollar and drag the yuan lower.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4765 per dollar, 48 pips or 0.07% weaker than the previous fix of 6.4717.

Yuan sheds gains

In the spot market, onshore yuan opened at 6.4781 per dollar and was changing hands at 6.4796 at midday, 46 pips weaker than the previous late session close.

Despite the recent deterioration in market sentiment, traders said falls in the yuan were rather limited, as investors await minutes from the Federal Reserve's latest meeting due on Wednesday and the annual Jackson Hole policy symposium next week for clues on the timing of Fed tapering.

The annual conference of central bankers could "have a greater impact on global financial markets", said Marco Sun, chief financial markets analyst at MUFG Bank. "Some market participants are waiting for the Fed to reveal signals on pulling back on bond buying.

And now it's the calm before the storm," Sun said, expecting the yuan to trade in a range of 6.45 to 6.49 per dollar in the near term.

Ming Ming, head of fixed income research at Citic Securities, said Fed's recent guidance on market expectation could avoid "taper tantrum" this time.

"Persistent trade surplus and foreign capital inflows since the pandemic have supported China's FX reserves and adequate preparations for the subsequent pressure on the yuan," Ming said in a note.

Investor hopes for more easing measures to underpin the Chinese economy rose again after Premier Li Keqiang told a cabinet meeting on Monday that China would step up "cross-cyclical" adjustments, keep economic operations within a reasonable range, and make good use of local government debt to spur effective investment.

"We expect local government bond issuance to accelerate and public spending to pick up. In terms of monetary policy, we expect the PBOC to keep liquidity ample and provide targeted credit support for SMEs and those sectors in difficulty," economists at BNP Paribas said in a note.

In global markets, the dollar index rose to 92.709 by midday from the previous close of 92.622, while the offshore yuan was trading at 6.4814 per dollar.