SHANGHAI: China's yuan edged higher against the dollar on Tuesday ahead of US inflation data, while strong demand for the Chinese currency in the forward market pushed the long end of the swap curve to the highest in six years.
Markets are watching US inflation trends for more clues on when the Federal Reserve will start to tighten monetary policy.
Higher US interest rates could trigger capital outflows from emerging markets.
On Tuesday morning, the yuan traded in tight ranges holding above the psychological 6.45 per dollar threshold.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.45 per dollar, 3 pips weaker than the previous fix of 6.4497.
The onshore spot yuan opened at 6.4488 per dollar and was changing hands at 6.4472 at midday, 53 pips firmer than the previous late session close.
Traders said the yuan was likely to continue tracking the dollar's movements in the near term as comments from the Fed's meeting next week could provide more insight on when it would begin to withdraw pandemic-era stimulus.
The Wall Street Journal reported on Friday that Fed officials will seek an agreement to begin paring bond purchases in November.
Meanwhile, signs of liquidity tightness in the interbank market also lent support, with benchmark one-year dollar/yuan swaps jumping to a high of 1,840 points, the loftiest since August 2015. Short-end swaps also moved upwards.
China's yuan off 1-week high, dollar demand weighs
Traders said rises in the swap points come as banks need to shore up their yuan positions towards the quarter-end and ahead of the week-long National Day holiday starting on Oct. 1.
Investors will also be paying close attention to the PBOC's open market operations on Wednesday, when 600 billion yuan ($93.07 billion) worth in a medium-term lending facility is set to expire.
"Another 50 bp reserve requirment ratio (RRR) cut will likely be delivered by the Chinese central bank in the second half, possibly around the October National Day holiday, to keep liquidity at a reasonably sufficient level," said Gao Qi, FX strategist at Scotiabank.
However, traders added that some major state-owned banks were seen very actively swapping dollars for yuan in recent sessions.
China's major state banks often act as agents for the central bank in currency markets, but they also trade on their own behalf.
By midday, the global dollar index fell to 92.598 from the previous close of 92.626, while the offshore yuan was trading at 6.4448 per dollar.
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