SHANGHAI: China’s yuan strengthened on Wednesday, in line with the yen as the Bank of Japan raised short-term rates in a surprise move, and after the Communist Party leadership signalled more stimulus measures.
The spot yuan opened at 7.2250 per dollar and was last trading 81 pips firmer than the previous late session close.
The Bank of Japan raised interest rates on Wednesday and unveiled a detailed quantitative tightening plan, taking another landmark step towards phasing out a decade of massive stimulus.
The yen rallied as much as 0.8% to an over three-month high of 151.58 per dollar soon after the BOJ’s decision was announced.
The yuan is up 0.4% against the dollar this month, thanks largely to bounces in the Japanese yen. But for the year, it is 1.9% weaker, under pressure as domestic woes around a moribund property sector, anaemic consumption and falling yields drive capital flows out of the yuan.
Chinese leaders signalled on Tuesday that the stimulus measures needed to reach this year’s economic growth target will be directed at consumers, deviating from their usual playbook of pouring funds into infrastructure projects. However, they didn’t announce specific steps.
“The statement acknowledged the growth headwinds and vowed to achieve the whole year’s economic targets, but didn’t offer any fresh views or ideas on how to deal with the economic challenges,” said Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets.
China’s yuan retreats; focus on Politburo meeting, major central bank decisions
Traders were also waiting for the Federal Reserve’s policy decision later on Wednesday - likely to be the next main catalyst for broad currency moves - with expectations the US central bank will lay the groundwork for a September rate cut.
Markets are expecting a September start to the Fed’s easing cycle, with about 68 basis points worth of cuts priced in for the rest of the year.
“We stay cautious ahead of the major central bank decisions this week and continue to look for broad consolidation within recent ranges ahead of the decisions,” said Maybank analysts in a note.
The yuan firmed even after data showed China’s manufacturing activity in July shrank for a third month, an official factory survey showed on Wednesday, keeping alive expectations Beijing will need to launch more stimulus to boost growth.
Prior to the 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 7.1346 per dollar, 1,073 pips firmer than a Reuters’ estimate.
The offshore yuan traded at 7.2415 yuan per dollar, up about 0.04% in Asian trade.
The dollar’s six-currency index was 0.077% lower at 104.36.
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