SHANGHAI: China's yuan edged up against the dollar on Tuesday on robust corporate demand, but traders said opportunities for a break higher are limited as expectations that the US Federal Reserve will move faster to hike interest rates underpin US yields.
Traders will be closely watching Fed Chair Jerome Powell later in the day for more clues on the central bank's plans.
Following prepared remarks for his nomination hearing on Monday in which he will pledge to prevent high inflation from becoming "entrenched", Powell will face questions from senators in his bid for a second four-year term.
"In the short term I really don't think the yuan is going to weaken much, as yuan longs will still find opportunities to enter," said a trader at a foreign bank. At the same time, "it's difficult for the market consensus to turn based solely on the effect of Fed hikes."
Corporate demand for yuan ahead of the long Lunar New Year holiday typically provides seasonal support for the currency.
Before the market open, the People's Bank of China (PBOC) set the midpoint rate at 6.3684 per dollar prior to market open, down from a two-week top on Monday of 6.3653.
Spot yuan opened at 6.3740 per dollar and was changing hands at 6.3706 at midday, 62 pips firmer that Monday's late session close.
The offshore yuan firmed to 6.378 per dollar from a close of 6.3813.
Expectations of higher US rates continue to rise alongside rising US inflation, with some of Wall Street's biggest banks now flagging four possible hikes this year.
In contrast, Chinese policymakers, increasingly focused on stabilising a slowing economy even before recent outbreaks of the novel coronavirus that causes COVID-19, are widely expected to maintain a loosening bias.
The northern Chinese city of Tianjin reported 40 new confirmed coronavirus cases on Tuesday morning, as it battles an outbreak of the highly infectious Omicron variant of the virus.
Analysts at ANZ said that they see a higher likelihood of a cut to the 1-year medium-term lending facility (MLF) rate, following a reduction in the loan prime rate in December.
"The 1Y MLF rate is currently too high to be a medium-term pivot for banks' asset pricing because there have been structural changes in the costs of other liabilities," they said in a note.
"Furthermore, China's policy stance has shifted to growth stabilisation. The optimisation of the policy rate system will help to transmit liquidity that has accumulated in the banking system to the real economy," they said.