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China’s yuan hit a two-week high against the US dollar on Thursday, which came under pressure after the Federal Reserve Chair Jerome Powell said US rate hikes could be scaled back “as soon as December”.

The dollar tumbled to a three-month low versus the yuan after Powell said the central bank was “slowing down” from the breakneck pace of three-quarter percentage point rate hikes that have prevailed since June, and that a “soft or softish” landing remained possible.

The comments boosted expectations for a smaller 50-basis-point rate hike at the Fed’s meeting on Dec. 14, after four consecutive 75-basis-point increases.

“The speech seemingly provided markets some clarity that the downshifting is coming earlier than expected, as markets were previously still split in their expectations for December before the Federal Reserve Chair’s comments,” said Yeap Jun Rong, a market strategist at IG Group, an online trading platform.

The spot yuan opened at 7.0450 per dollar and was changing hands at 7.0730 at midday, 199 pips stronger than the previous late session close and -0.69% away from the midpoint.

The spot rate is currently allowed to trade 2% above or below the official fixing on any given day.

Yuan gains, shrugs off weak factory survey

The People’s Bank of China set the midpoint rate at 7.1225 per US dollar prior to market open, firmer than the previous fix of 7.1769.

The global dollar index, which measures the currency against six major peers including the yen and euro, fell to 105.678 from the previous close of 105.95.

The yuan was also bolstered by traders’ optimism that China is making a gradual shift away from its zero-COVID strategy and towards the reopening of its economy.

The Chinese cities of Guangzhou and Chongqing announced an easing of COVID curbs on Wednesday, a day after demonstrators in southern Guangzhou clashed with police amid a string of protests against the world’s toughest coronavirus restrictions.

“The path for now is towards looser Covid-19 restriction and a shift from the dynamic zero strategy that the government had held onto in the past,” said Khoon Goh, head of Asia research at ANZ.

“This is what the market is pricing in, that there will be growth recovery and the worst is behind us,” he said.

The offshore yuan was trading 0.06% stronger than the onshore spot at 7.0677 per dollar. Around midday, it gave back some of its gains after rising as much as 209 pips in early Asia trading hours.

“After the strong moves we have seen in the yuan this week we are bound for some profit-taking in the near term,” said Goh.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.8975, 3.26% away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.

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