HONG KONG: China’s yuan inched lower on Friday amid broad dollar strength ahead of a widely-awaited speech by the Federal Reserve chief on US monetary policy.
Continued moves by China’s central bank to support the currency by setting stronger-than-expected daily fixings also kept trading in a tight range.
The People’s Bank of China (PBOC) set the midpoint rate , around which the yuan is allowed to trade in a 2% band, at 7.1883 per US dollar prior to the market open, firmer than the previous fix of 7.1886.
The spot yuan opened at 7.2785 per dollar and was changing hands at 7.2868 at midday, 78 pips or 0.11% weaker than the previous late session close and 1.37% weaker than the midpoint.
Friday was the fourth time that the daily fixing was set at over 1,000 pips deviation from Reuters’ estimates since the PBOC began setting firmer daily guidance since late June.
But “investors have generally looked passed the magnitude of the daily fixing deviation from market estimates, because by now, they are getting more accustomed to a large deviation,” said Kiyong Seong, lead Asia macro strategist at Societe Generale.
“Instead, they care more about whether the midpoint rate is set significantly stronger than the previous session’s to gauge if there is a definitive level tolerated by the PBOC,” he said.
The yuan, up 0.3% this week but down over 5% this year, has been under pressure due to concerns on the country’s property sector crisis, which accounts for a quarter of China’s economy.
Further weighing on the yuan is the country’s sputtering economic recovery, and China’s widening yield spreads with the US, which reached the widest in 16-year this week.
“The PBOC has stepped up FX management using a wide variety of tools itighteningdaily fixing, tighening offshore yuan funding and window guidance,” said Bank of America analysts in a research note on Friday.
The latest window guidance came this week as China’s central bank has asked some domestic banks to scale back their outward investments through the Bond Connect scheme, an investment link enabling mainland institutional investors to invest in bonds trading in Hong Kong, Reuters reported on Friday.
The move is aimed at containing yuan outflows into Hong Kong, and thus tightening offshore yuan liquidity to raise the financing cost.
The dollar index rose to 104.194 from the previous close of 103.982., setting at an over two-month peak and on course for its straight week of gains.
Investors will be watching Federal Reserve chair Jerome Powell’s highly anticipated speech on the economic outlook later at 10:05am ET Friday at the annual symposium at Jackson Hole, Wyoming.
The market will be looking for clues on whether the Fed is nearly done with interest rate hikes, and how long it plans to hold rates high.
The offshore yuan was trading -0.03% away from the onshore spot at 7.2891 per dollar.
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