China's yuan flat as dollar recovers ahead of Jackson Hole

SHANGHAI: China's yuan was steady against the US dollar on Tuesday as the greenback emerged from its biggest one-day fall since May, but moves were muted ahead of a Federal Reserve symposium that could shed light on the timeline for an end to stimulus.

"There may have been too much unanimity in market expectations earlier, the dollar index rose too quickly and this time its fall is relatively steep," said a trader at a foreign bank, adding the Delta-variant driven surge in coronavirus infections in the United States had led to a divergence in expectations over Fed tapering.

"The Fed may not be able to confirm specific timing for tapering at this Jackson Hole meeting," he said.

The dollar's earlier plunge fed into a stronger midpoint rate for the yuan's daily trading band on Tuesday, at 6.4805 per dollar, its firmest in a week.

Spot yuan opened at 6.4797 per dollar on Tuesday and was changing hands at 6.4817 at midday, 1 pip weaker than the previous late session close. The offshore yuan softened to 6.4828 per dollar. Ahead of the closely watched Jackson Hole keynote address by Fed Chair Jerome Powell, US business activity growth slowed for a third straight month in August, hit by capacity constraints, supply shortages and the coronavirus surge.

As traders await Fed signals, they have also been pondering the likelihood of further easing by Chinese monetary authorities to support an uneven economic recovery.

Weaker-than-expected economic data has boosted expectations in recent weeks that China would pursue more easing measures to cushion a slowdown. The People's Bank of China (PBOC) cut banks' reserve requirements in July and has provided more medium-term loan funding than expected, though it has so far left rates unchanged.

"Recent statements issued by the PBoC and Politburo suggest that PBoC has likely shifted towards easing bias and thus, bets on reserve requirement ratio (RRR) cuts remain very much alive. If we just rely on historical data in the past decade, RRR cuts typically come in a bunch and have been accompanied by a rise in USDCNY," analysts at Maybank said in a note.

But they added that a more targeted approach, including additional fiscal support, could reduce the risks of a "significant" weakening in the yuan. A current account surplus, China's perceived resiliency to COVID-19 and the yuan's low sensitivity to US Treasury yields have also likely supported the currency, they said.