SHANGHAI: China’s yuan pulled back against the dollar on Tuesday, having hit one-month high a day earlier as traders were reluctant to place any substantial bets ahead of the long Labor Day holiday and the Federal Reserve’s monetary policy meeting this week.
China’s financial markets will be closed for extended holidays from Wednesday, with trading set to resume next Monday.
The yuan has lost 2% against the dollar so far this year and is on course for the fourth straight monthly loss, weighed down by its relative low yields versus other currencies.
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 7.1063 per dollar, 3 pips firmer than the previous fix of 7.1066.
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 1,396 pips firmer than the Reuters estimate of 7.2459.
Maybank analysts said the official fix reflects the central bank’s desire to retain a grip on the fragile yuan.
“Right now thus far, PBOC is keeping the reference rate steady at the 7.10-handle,” they said in a note to clients.
“Raising the USD/CNY fix could potentially drive the USD/CNH higher and what PBOC likely desires is a controlled pace of yuan depreciation in the face of a strong USD environment.”
Yuan stutters near 5-month low
In the spot market, the onshore yuan opened at 7.2383 per dollar and was changing hands at 7.2427 at midday, 177 pips weaker than the previous late session close.
“We see the possibility for further near-term weakness towards the key 7.30 level, as the authorities have been gradually allowing the onshore spot to adjust,” Khoon Goh, head of Asia research at ANZ, said in a note.
Goh revised down his year-end forecast for the yuan to 7.2 per dollar from 7.0 previously.
The onshore spot yuan hit a high of 7.22 a day earlier, the strongest level since March 29. Currency traders attributed yuan’s sudden strength to Japanese authorities’ suspected intervention to support the yen, which bounced sharply on Monday from 34-year lows.
Markets are also keeping a close watch on the upcoming Fed policy meeting and China’s month-end Politburo meeting for more clues on the currency’s movements, traders said.
The Fed is expected to hold rates at 5.25%-5.5%, but markets will pay close attention to comments from policymakers that could shed light on the monetary policy trajectory in the world’s largest economy.
Separately, the market hardly budged after the release of China’s April official factory survey showed manufacturing activity expanded at a slower pace.
By midday, the global dollar index rose to 105.847 from the previous close of 105.579, while the offshore yuan was trading at 7.2528 per dollar.
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