SHANGHAI: The yuan touched a near one-month high against the dollar on Monday as weekend talks between senior Chinese and US officials raised hopes the two sides may find ways to start ironing out a host of disputes.
Currency traders said the market largely shrugged off broad dollar strength over expectations for US Federal Reserve's stimulus tapering from next month, as investors focusing more on recent developments in Sino-US relations.
China said on Saturday it pressed the United States to eliminate tariffs in talks between the countries' top trade officials that Washington saw as a test of bilateral engagement between the world's biggest economies.
China's yuan flat after week-long holiday, Sino-US relations in focus
Trade disputes between Beijing and Washington have been one of the key factors influencing the Chinese currency over the past few years.
Rising expectations of a possible partial removal of US trade tariffs lent support to the yuan, said Tommy Xie, head of Greater China research at OCBC Bank.
Prior to the market opening, the People's Bank of China (PBOC) set the midpoint at 6.4479 yuan per dollar, 125 pips, or 0.2%, stronger than the previous fix of 6.4604. It was the firmest since Sept. 16.
The strengthened official guidance rate pushed China's trade-weighted yuan basket index to 100.09, the highest since Feb. 3, 2016, and up 5.54% so far this year, according to Reuters' calculations based on official data.
In the spot market, onshore yuan opened at 6.4420 per dollar and strengthened to a high of 6.4389, the strongest level since Sept. 16. By midday, it was changing hands at 6.4376, 64 pips firmer than the previous late session close.
A trader at a foreign bank said he expected the yuan strength to continue in the short term, but added that "if the trade surplus shrunk this month, or there would be no substantial improvements in the Sino-US relations, the yuan could weaken."
Meanwhile, tighter liquidity conditions in the onshore interbank money market following the PBOC's move to withdraw cash from the banking system also lent support to the yuan, according to traders.
The PBOC withdrew the most cash on a net basis for the week since mid-February last week, and drained another 190 billion yuan via open market operations on Monday, bringing total net cash withdrawal to 510 billion yuan after the week-long holiday ended on Oct. 7.
The volume-weighted average rate of the benchmark overnight repo traded in the interbank market, considered one of the best indicators of general liquidity in China, rose to 2.1316% on Monday morning, the highest since Sept. 22.
By midday, the global dollar index traded at 94.144, while the offshore yuan was trading at 6.441 per dollar.
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