Yuan rebounds from 3-week low, breaches 6.5/dollar

SHANGHAI: China's yuan rebounded from its lowest against the dollar in more than three weeks to breach a key threshold on Monday, as investors lowered their expectations that the Federal Reserve might soon withdraw its pandemic-era stimulus.

Currency traders said global market attention will be on the annual Jackson Hole policy symposium, which takes place on Aug. 27 virtually, for possible comments on the timing of the Fed's tapering.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4969 per dollar, 15 pips firmer than the previous fix of 6.4984.

In the spot market, onshore yuan opened at 6.4920 per dollar and was changing hands at 6.4905 at midday, 107 pips firmer than the previous late session close which was the weakest close since July 27.

Traders said the yuan strengthened past the psychologically important 6.5 per dollar level as market worries over an imminent Fed tapering faded. But uncertainty around the Fed's monetary policy stance and COVID-19 developments both in China and abroad kept the gains in check.

"If the epidemic continues to deteriorate, the dollar may rise further; meanwhile, the expanding risk aversion could force Fed Chairman Jerome Powell to be cautious with his remarks at the Jackson Hole conference to curb the dollar's strength," said Li Liuyang, chief currency analyst at China Merchants Bank. Li added that the Chinese currency was likely to maintain its gradual depreciation trend under such circumstances.

China's health authority reported on Monday no new locally transmitted cases of COVID-19 for the first time since July, offering more signs that the current outbreak which began late last month was coming under control.

Many market analysts also saw downside pressure on the yuan in the near term.

"The 6.50-figure is no longer a strong resistance level (for dollar/yuan) and the next is seen at 6.5320. Momentum is still a tad bullish but stochastics are showing signs of turning from near overbought condition," analysts at Maybank said in a note.

Economists at Huatai Securities lowered their forecasts for the yuan, citing slower domestic economic growth momentum and Fed tapering.

"Despite short-term fluctuations, Chinese assets still have greater allocation attractiveness due to higher returns in the mid- to long term," they said in a note, expecting the local currency to trade at 6.38 per dollar at end-2021 and 6.18 at end-2022, from 6.28 and 6.08, respectively.

By midday, the global dollar index fell to 93.31 from the previous close of 93.481, while offshore yuan was trading at 6.494 per dollar.