China’s yuan hits one-month high, buoyant dollar seen limiting gains

SHANGHAI: The yuan firmed to a one-month high against the US dollar on Monday on investors’ hopes that a stabilising Chinese economy could support the currency, but traders said a firm greenback would continue to limit further yuan strength.

The most recent boost to the dollar came on Friday after US Labor Department data showed strong job gains in May, though the rate of growth slowed.

With the data indicating the US economy is withstanding high inflation and rising borrowing costs for now, the US Federal Reserve remains on track for a half-point interest rate increases in June, July, and perhaps even beyond.

Traders said that without US inflation turning lower, the dollar index would be unlikely to correct, limiting the yuan’s upside and keeping it rangebound. The ongoing impact of COVID-19 curbs on the Chinese economy would also lead to uncertainty for businesses and households, despite some reopening in Beijing and Shanghai, analysts at Mitsubishi UFJ said in a note.

In the latest indication of continued headwinds for the Chinese economy, a private sector survey of the country’s services activity released Monday showed continued contraction for a third straight month in May - though at a slower rate than in previous months.

“In the short term, the yuan will still be fluctuating in a range. Longer term it will depend on the data,” said a trader at a foreign bank. “I tend to see room for more corrections in the yuan.”

Traders and analysts said they are in particular looking ahead to this Thursday’s meeting of the European Central Bank, which is expected to set the groundwork for an interest rate hike at its July meeting.

Before the market open, the People’s Bank of China set the yuan’s daily midpoint at 6.6691 per dollar, firmer than the previous fix of 6.7095.

China’s yuan firms

Onshore spot yuan opened at 6.6391 per dollar, its firmest level since May 5, before giving up ground to 6.6551 by midday, 49 pips firmer than Friday’s late session close.

The offshore yuan was last at 6.6604 per dollar, softer than Friday’s close of 6.6558, having turned lower from a high of 6.6452 per dollar earlier in the session.

A possible lifting of US tariffs on Chinese goods to fight inflation would likely have little effect on the yuan’s exchange rate, Ken Cheung, chief Asian FX Strategist at Mizuho said in a note.

“With prevailing downside risks for China economy, it is hard to imagine that the Chinese government will push RMB appreciation to counter the tariff cut impact,” he said.

“The reopening, China data and stimulus package will remain the key drivers for the RMB market. Hence, we maintain our view of two-way trading for the CNY in the near term.”