SHANGHAI: China's yuan pulled back on Tuesday after touching an 11-day peak in early trade, but moves were muted as traders focused on upcoming inflation data from the US and China for clues to the timing of interest rate hikes.
Traders said while there was little room for a clear break higher given broad dollar strength, the yuan continued to enjoy short-term support after stronger-than-expected trade data released on Sunday.
"There's still upside pressure from FX sales toward the year end, so we're bullish on the yuan and could see it touching June highs. The Fed may not hike as quickly as imagined," said a trader at a Chinese bank.
For its part, China's central bank will likely move cautiously on loosening monetary policy to bolster the economy, as slowing economic growth and soaring factory inflation fuel concerns over stagflation, policy sources and analysts said.
Before the market open, the People's Bank of China set the yuan's daily midpoint at 6.3903 per dollar prior to market open, its firmest in nearly two weeks.
That helped spot yuan to strengthen in early trade after opening at 6.3912 per dollar, pushing it to a top of 6.3888. By midday it had softened to 6.3958 per dollar, 28 pips weaker than Monday's late session close.
Offshore yuan also weakened to trade at 6.3936 per dollar from Monday's close of 6.3886.
A softening of the Hong Kong dollar echoed the weaker yuan. It was trading at 7.7902, moving closer to the psychologically key 7.8 level. Weakness in both currencies stood in contrast to a rally in emerging market counterparts.
Ken Cheung, chief Asian FX strategist at Mizuho in Hong Kong, said indebted Chinese property developers affected by intensifying worries over a liquidity crisis in the sector might be selling Hong Kong dollars to help them cope.
"Potentially these developers could attempt to sell their property development projects in HK to acquire the funding to repay the USD bond," he said in a note. "If the HKD spot was flow driven, the HKD selling should prove to be short-lived and HKD spot will likely be capped below 7.80 handle."
A think-tank under China's powerful state council met real estate developers and banks in the southern city of Shenzhen on Monday, a source with direct knowledge of the meeting told Reuters.
Beleaguered China Evergrande Group faces a hard deadline for more than $148 million in bond interest payments on Wednesday.
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