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SHANGHAI/SINGAPORE: China’s yuan bounced from a three-week low against the dollar on Wednesday, as a firmer-than-expected official midpoint rate offset weakness from disappointing inflation data, while state banks also lent support.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate around which the yuan is allowed to trade in a 2% band at 7.1588 per US dollar, 23 pips weaker than the previous fix of 7.1565 and the lowest since July 12.

However, the fixing was much stronger than market expectations, traders and analysts said.

It was also 610 pips firmer than Reuters’ estimate, the widest such discrepancy since July 26, a sign investors interpreted as authorities’ discomfort with excessive weakness in the local currency.

In the spot market, the onshore yuan opened at 7.2184 per dollar and was changing hands at 7.2087 at midday, 112 pips firmer than the previous late session close.

China’s yuan falls to a 3-week low as July trade data disappoints

The spot rate hit a three-week low of 7.2225 on Tuesday.

Currency traders said corporate dollar demand was very heavy on Wednesday.

To prevent the yuan from sinking too fast, major state-owned banks sold US dollars to buy yuan in the onshore spot market, sources told Reuters.

The state banks usually act on behalf of China’s central bank in the country’s foreign exchange market, but they can also trade on their own behalf.

Such dollar selling also comes as China’s consumer prices posted their first annual decline in more than two years in July, while factory gate prices extended their falls, as lacklustre demand weighed on the economy.

“Given the base remained high last year, CPI will hardly rebound significantly in the second half of the year,” said Xing Zhaopeng, senior China strategist at ANZ.

“It is expected to hover around 0. It would be hard to manoeuvre monetary policy. The Politburo meeting called for a stable yuan exchange rate, which would conflict with monetary easing.”

The disappointing data is expected to prompt the central bank to strike a delicate balancing act.

Further monetary easing measures would inevitably widen the yield differentials between China and other major economies, piling downward pressure on the yuan, while economic fundamentals remain a key factor deciding the currency’s value.

By midday, the global dollar index fell to 102.46 from the previous close of 102.528, while the offshore yuan was trading at 7.2206 per dollar.

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