SHANGHAI: China's yuan held steady against the dollar on Wednesday, as some investors became cautious that the Federal Reserve could deliver an earlier-than-expected interest rate hike.
For now, traders were waiting to see the Fed's minutes from a December meeting due later in the session, to provide more clues about the timing of any US rate hike.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3779 per dollar, 15 pips firmer than the previous fix 6.3794.
In the spot market, the onshore yuan opened at 6.3720 per dollar and was barely changed at midday, standing just a few pips below Tuesday's close.
China's yuan eases, dragged by narrowing yield advantage
Traders reported persistently strong demand for yuan, as corporates converted their dollar receipts ahead of the week-long Lunar New Year holiday, which starts on Jan. 31 this year.
"Seasonal changes in the trade surplus brought about by the Christmas shopping season in developed countries, and corporate's financial settlement and employee bonuses before the Lunar New Year have made the FX supply stronger at year-end and the beginning of the year," said Liu Yaxin, macro analyst at China Merchants Securities.
Dealers expect PBOC to inject more liquidity as the holiday approaches, but market participants and analysts are split over whether it would cut the interest rate on its medium-term lending facility (MLF) loans.
A reduced yield premium between China and the United States could raise risks of capital outflows and put pressure on the yuan.
"The yuan exchange rate could act as a stabiliser in balancing the policy divergence between China and the United States to free up more room to maneuver domestic monetary policy, and the yuan would possibly be allowed to have higher flexibility in depreciation," Zhong Zhengsheng, chief economist at Ping An Securities said in a note.
Zhong expects the PBOC to lower the reserve requirement ratio by a further 1.0 to 1.5 percentage points in 2022 and cut interest rates by 10 to 15 basis points if the economy looks like faltering.
By midday, the global dollar index fell to 96.214 from the previous close of 96.262, while the offshore yuan was trading at 6.3752 per dollar.
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