SHANGHAI: The yuan was largely flat against the dollar on Wednesday, though it's value struck a near six-year high on an index of currencies belonging to China's major trading partners.
A burgeoning trade surplus, fueled by strong export growth and year-end seasonal demand has helped the yuan resist the broad dollar strength as exporters have been converting more dollar receipts, traders said.
Prior to market's open, the People's Bank of China (PBOC) set the midpoint rate at 6.3903 per dollar, 26 pips firmer than the previous fix of 6.3929.
Wednesday's midpoint largely matched market expectations after it came in persistently weaker than projections over the past week.
China's yuan firms on year-end demand, analysts expect weakness in 2022
The firmer fixing sent the index measuring the yuan' s trade weighted value to a near six-year high of 102.53, the highest since Dec. 3, 2015, and up 8.11% since the start of the year.
The onshore yuan, however, has only gained 2.14% against the dollar in the same period.
"The authorities seem to have focused more on supporting USD/CNY rather than capping the RMB index," Irene Cheung, senior strategist for Asia at ANZ.
Cheung added that recent weaker-than-expected yuan midpoint fixings and occasional state bank dollar buying provided a ceiling for the yuan at 6.36 to 6.37 per dollar level.
In the spot market, the onshore yuan opened at 6.3890 per dollar and was changing hands at 6.3918 at midday, 5 pips firmer than the previous late session close.
Despite strong corporate demand for the yuan, traders said market participants were debating whether yuan would reverse course, given the prospects for monetary policy to be tightened in other major economies, including the United States.
"We expect the Chinese yuan to continue to trade well, even as the US Federal Reserve has embarked on monetary policy normalisation," said ANZ's Cheung.
But a trader at a Chinese bank said fast growth seen in the export sector since the pandemic was unsustainable, while possible Fed's potential interest rate hikes next year would inevitably draw global capital to dollar denominated assets.
By midday, the broad dollar index rose to 96.578 from the previous close of 96.517, while the offshore yuan was trading at 6.3931 per dollar.
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