SHANGHAI: The yuan held steady against the dollar on Tuesday ahead of US economic data that will offer clues on the timing of Federal Reserve rate cuts, while firmer-than-expected guidance put a floor under the Chinese currency.
Prior to market opening, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1057 per dollar, 23 pips firmer than the previous fix 7.1080.
The central bank continued its months-long practice of setting the rate at levels firmer than market projections, widely viewed by traders as an attempt to keep the currency stable.
Tuesday’s midpoint was 888 pips firmer than a Reuters estimate of 7.1945.
“Currency depreciation pressures stemming from further policy rate cuts could weigh on investor confidence and capital flows, perpetuating a negative depreciation loop,” economists at Morgan Stanley said in a note.
“Indeed, policymakers have been keeping the yuan fixing stronger and also keeping liquidity conditions tighter to guide interbank rates above policy rates since August 2023,” they said, adding it indicated that the PBOC has been trying to avoid excessive currency depreciation pressure.
In the spot market, the onshore yuan opened at 7.1950 per dollar and was changing hands at 7.1982 at midday, 2 pips weaker than the previous late session close.
Yuan softens ahead of US inflation
The onshore yuan swung in a tight range of less than 40 pips in morning deals, with trading volume contracting to about $9.4 billion by midday, down from a normal half-day volume of about $15 billion.
Currency traders said such sideway trades were likely to continue for the time being, before the US Federal Reserve offers a clearer monetary easing trajectory.
“It feels like the market can only wait waiting for a clearer guidance from the Fed, an easing dollar and falling US rates,” said a trader at a Chinese bank.
Markets are paying close attention to the upcoming US core personal consumption expenditures price index - the Fed’s preferred measure of inflation - due later this week for more clues on the trajectory of monetary policy in the world’s largest economy, traders said.
By midday, the global dollar index fell to 103.758 from the previous close of 103.827, while the offshore yuan was trading at 7.2099 per dollar.
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