China’s yuan set for best week in two months as dollar bulls lie low

SHANGHAI: China’s yuan inched higher against the dollar on Friday and looked set for its biggest weekly gain in two months, as slower-than-expected US inflation readings prompted some investors to dial back hawkish Federal Reserve expectations.

Meanwhile, domestic market participants expect the People’s Bank of China (PBOC) to withdraw some cash from the banking system at a policy loan rollover next Monday.

Prior to market opening, the PBOC set the midpoint rate at 6.7413 per dollar, 89 pips weaker than the previous fix 6.7324.

In the spot market, the onshore yuan opened at 6.7440 per dollar and was changing hands at 6.7355 at midday, 95 pips firmer the previous late session close.

If the yuan finishes the late night session at the midday level, it would have gained 0.41% to the dollar for the week, its biggest such gain since early June.

Traders said much of the yuan strength was reacting to dollar weakness after US inflation report, which came in not as hot as expected. The data prompted some investors to slash bets on another 75-basis-point Fed rate hike in September.

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But the yuan was likely to remain rangebound as some investors await the next catalyst.

A trader at a Chinese bank said some market participants have switched their attention to the PBOC’s medium-term policy loan operation to gauge its monetary policy stance.

A Reuters poll showed China’s central bank was expected to partially roll over a maturing medium-term lending facility (MLF) on Monday, while keeping the rate unchanged, as rising inflationary pressures limit room for policy support.

Gao Qi, FX strategist at Scotiabank, said the central bank would “not flood the economy with excessive liquidity and a weaker yuan that makes imports into China more expensive”, which is “not in the monetary authority’s interest at this stage”.

Gao expects China to maintain its pro-growth stance and keep the yuan stable in the run-up to the politically significant 20th Party Congress later in the year.

By midday, the global dollar index stood at 105.189, while the offshore yuan was trading at 6.7326 per dollar.