SHANGHAI: China's yuan inched higher on Tuesday, as continued seasonal corporate demand for the local unit outweighed broad dollar strength and a weaker-than-expected official yuan guidance rate.
Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3929 per dollar, 23 pips firmer than the previous fix of 6.3952.
The higher yuan comes even as the dollar was supported by US President Joe Biden's decision to reappoint Federal Reserve Chair Jerome Powell for a second term, emboldening bets of higher US interest rates.
Although the PBOC lifted the official yuan midpoint rate higher, the official guidance was 69 pips softer than a Reuters estimate of 6.3860 per dollar.
Some market analysts and traders said the weaker-than-expected fixings over the past week suggest authorities may have started to get slightly uncomfortable with the recent yuan rally.
Ming Ming, head of fixed income research at CITIC Securities, said the yuan was likely to stay strong and resilient in the short-term on corporate demand. Chinese companies traditionally have greater demand for the yuan for various payments in the last two months of the year.
Indeed, traders said they kept receiving queries from their corporate clients to convert their dollar receipts into the yuan, and that this could persist until the end of 2021.
Market sentiment was also underpinned by a Reuters report that some Chinese banks had been told by financial regulators to issue more loans to property firms for project development, in efforts to marginally ease liquidity strains across the industry.
In the spot market, the onshore yuan opened at 6.3852 per dollar and was changing hands at 6.3851 at midday, 9 pips firmer than the previous late session close.
By midday, the broad dollar index rose to 96.529 from the previous close of 96.467, when the offshore yuan was trading at 6.3864 per dollar.
But market analysts expected some downard pressure over the longer term.
"In the long run, higher expectations for other economies to gradually raise interest rates next year and the expected falls in China's export growth may put the yuan under pressure," Ming said.
Zhang Yu, chief analyst at Huachuang Securities, said the long stretch of yuan strength "may be drawing to an end", with monetary policy and economic growth in China and the United States set to diverge in 2022.
While the Fed is expected to hike interest rates late next year, markets believe the Chinese central bank still has an easing bias in its policy stance to prop up the economy.
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