SHANGHAI: The yuan rose to a 1-1/2-month high against a broadly weaker dollar on Tuesday, which was pulled down by US rate cut expectations, while persistently stronger daily central bank guidance continued to shore up the Chinese currency.
Recent declines in the dollar follow rising bets the Federal Reserve could begin cutting rates by June, which gained momentum last week after dovish comments from Fed Chair Jerome Powell.
Prior to 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 7.0963 per dollar, 6 pips firmer than the previous fix of 7.0969.
The official midpoint was fixed at the strongest level since Jan. 2 and was also much stronger than the market had projected, traders said, as the central bank continued its months-long practice of setting the rate with a strengthening bias.
Tuesday’s midpoint was 922 pips firmer than a Reuters estimate of 7.1885.
“RMB expectations remain well anchored by the persistent yuan fixing guidance,” Ken Cheung, chief Asian FX strategist at Mizuho Bank, said in a note.
“The PBOC should be in no rush to exit its yuan fixing policy support. From a market perspective, the PBOC’s asymmetric yuan fixing policy support provides a protection against USD/CNH upside risk, leading to falling demand in buying USD/CNH call options.”
In the spot market, the onshore yuan opened at 7.1750 per dollar and rose to a high of 7.1741, the strongest level since Jan. 31.
By midday, it was changing hands at 7.1768, 41 pips firmer than the previous late session close.
“China’s National Party Congress (NPC) ended its annual session yesterday, and there were no major surprises in economic policy, even if headline fiscal stimulus was considered underwhelming,” said Chang Wei Liang, FX & credit strategist at DBS.
“RMB could thus be lifted by an upturn in trade, even if investors adopt a wait-and-see stance towards Chinese assets.”
Markets focus now switches to key US inflation data due later in the session for more clues on the rate outlook in the world’s largest economy, which could affect the dollar and other major currencies.
By midday, the global dollar index fell to 102.82 from the previous close of 102.869, while the offshore yuan was trading at 7.1817 per dollar.
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