SHANGHAI: China's yuan touched a nearly four-week high against the dollar on Monday as the greenback retreated on rising hopes of a possible peaceful path out of the Ukraine crisis, but traders and analysts said room for further appreciation is limited.
In fact, by midday the yuan had turned weaker as worries over Ukraine resurfaced, after Reuters reported that US President Joe Biden's administration has prepared an initial package of sanctions against Russia that includes barring US financial institutions from processing transactions for major Russian banks, if Ukraine is invaded.
Traders said the Chinese currency continues to benefit from strong foreign exchange settlement demand in the short term, while the country's exports remain resilient.
"Market expectations are still very stable, I don't think the yuan will deviate very far from 6.32," said a trader at a foreign bank.
China's yuan firms to three-week high on stronger fixing
The yuan's initial rise on Monday came despite a slightly weaker daily fixing set by the People's Bank of China , at 6.3401 per dollar prior to market open, compared with 6.3343 on Friday.
Spot yuan opened at 6.3260 per dollar and rose to a top of 6.3215 per dollar in the morning session, its strongest since January 26. By midday it had changed course to trade at 6.3276, 19 pips weaker than Friday's late session close.
The offshore yuan was still firmer at midday, rising to 6.324 per dollar from 6.3255 on Friday, with the global dollar index at 95.844 from the previous close of 96.043.
In a note, CIB Research said that "safe haven" attributes of yuan-denominated assets would continue to support a relatively strong exchange rate in the near term to a bottom of 6.3 per dollar, but that narrowing China-US spreads could increase medium-term pressure on the yuan.
In a commentary published on Monday on the official WeChat account of China Finance, a magazine run by the PBOC, a former Chinese forex regulator said that a narrowing spread would likely lead to a net decrease in foreign capital inflows into China this year.
But Guan Tao, global chief economist at BOC International and former head of the balance of payments department of the State Administration of Foreign Exchange (SAFE), said that market players should remain on guard and "avoid linear, unilateral thinking".
China kept its benchmark lending rates for corporate and household loans unchanged at its February fixing on Monday, in line with market expectations.
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