Yuan inches up, gains capped as state banks purchase dollars

SHANGHAI: China's yuan inched higher against a weaker dollar on Monday, as investors pushed back expectations for when the US Federal Reserve will begin tapering its massive stimulus.

However, gains were capped as sources told Reuters that some major Chinese state-owned banks were seen buying the greenbacks in the onshore spot market late on Friday. That had pushed the yuan sharply weaker, prompting some market participants to become cautious and wonder about the policy stance.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at a more than 2-1/2-month high of 6.4529 per dollar, 48 pips or 0.07%, stronger than the previous fix of 6.4577.

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In the spot market, onshore yuan opened at 6.4550 per dollar and was changing hands at 6.4546 at midday, 39 pips firmer than the previous late session close.

Some currency traders said the state bank actions on Friday could suggest authorities may want a stable currency for now due to uncertainties in overseas markets including Fed tapering.

China's major state-owned banks often act as agents for the central bank in currency markets, but they also trade on their own behalf.

The marginal strength in the yuan on Monday morning came as some traders saw chances for the Fed to announce the tapering of bond purchases in September became very narrow after the downbeat US payrolls.

Fed tapering could boost the dollar and pressure other major currencies, including Chinese yuan, as a shrinkage in yield premium could lead to capital outflows from emerging markets.

However, Marco Sun, chief financial markets analyst at MUFG Bank, said the impact on the yuan could be rather limited this time round.

"We believe capital outflows will be mostly reflected in the domestic stock market dominated by retail customers, rather than in the domestic bond market, which is dominated by institutional investors," he said, expecting overseas institutional investors to continue purchasing the Chinese government bonds to offset yuan's depreciation pressure.

By midday, the global dollar index rose to 92.215 from the previous close of 92.11, while the offshore yuan was trading at 6.4475 per dollar.