Yuan weakens ahead of Fed

SHANGHAI: China’s yuan slightly weakened against the dollar on Tuesday ahead of an expected US interest rate hike and as lingering concerns over domestic COVID-19 cases overshadowed optimism about Beijing’s efforts to stimulate the economy.

Onshore yuan was changing hands at 6.7527 at midday, 7 pips weaker than the previous late session close, despite the central bank setting a firmer midpoint.

The US Federal Reserve is expected to raise rates again on Wednesday by 75 basis points, with the market focused on any clues about the future pace of tightening.

China reported 976 new coronavirus cases for July 25, including 148 symptomatic cases, up from 800 new cases a day earlier.

Maybank said in a report that sentiment continues to be curbed by COVID uncertainties, while “eyes are also on the Biden -Xi call by the end of July, and whether the US will call off a trip by House Speaker Nancy Pelosi to Taiwan - an act that could escalate tensions between the US and China.”

The anxiety weighed on sentiment, which had benefited from signs that China is stepping up its support for the economy.

A source told Reuters on Monday that China will launch a $44 billion real estate fund to help property developers resolve a crippling debt crisis.

China has also pledged credit support to tourism and culture firms that are facing operational challenges.

Alibaba’s plan to apply for primary listing in Hong Kong also seems to have aided yuan sentiment in morning trading, according to Maybank.

Traders will also monitor China’s Politburo meeting likely to be convened on July 29.

“China’s leadership may reiterate support for reasonable housing demand, while emphasising the need for project completion, in response to the recent mortgage boycott,” Standard Chartered wrote in a report.

A possible slowdown in the pace of US rate hikes following this week’s meeting could drag on the dollar and benefit the yuan.

“The USD Index, or DXY might have seen its high for the year,” DBS wrote in a note on Tuesday.