Yuan hovers near 3-1/2-year peak ahead of economic data

HONG KONG: China’s yuan edged up to near a 3-1/2-year high against the dollar on Wednesday, as the central bank continued to manage the pace of appreciation against a backdrop of weakness in the U.S currency and ahead of economic activity data later in the day.

The yuan last traded a shade stronger at 6.7411 per dollar, hovering near the strongest level since February 2023 of 6.74 hit last week.

The offshore yuan traded at 6.7415 yuan per dollar, up about 0.04% in Asian trade.

The dollar’s six-currency index was 0.07% lower at 99.52, near its weakest levels of the month. US retail sales unexpectedly fell in July, bolstering expectations that the Federal Reserve would not raise interest rates in September.

The yuan is up 0.7% against the dollar this month, and 3.8% firmer this year.

“We believe the conditions for a continued weakening of the US dollar are taking shape, though policy confirmation is still needed to send a clear signal,” analysts at CICC said in a note.

Market conditions have generally shifted in a direction favorable to the yuan, creating a fairly pronounced appreciation bias, they added. But if further dollar weakness materialises, policymakers may continue to stabilise expectations and maintain a moderate rate of appreciation.

Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.7873 per dollar, its strongest since February 8, 2023, and 491 pips weaker than a Reuters’ estimate. The spot yuan is allowed to trade a maximum of 2% on either side of the fixed midpoint each day.

 The central bank has been gradually strengthening its daily yuan official guidance but at levels weaker than market expectations, suggesting it wants to manage the pace of appreciation, traders and analysts said.

 “The sizeable fixing premium signals resistance to an overly rapid move” and allows for a measured pace of RMB appreciation,“ OCBC analysts said in a note.

A slew of data later in the day will provide more clues about the health of the world’s second-largest economy, after July bank loans posted a record contraction as credit demand falters.

China’s industrial output was expected to rise 4.8% in July from a year earlier, slowing from 5.3%, while retail sales was forecast to expand 1.5%, better than 1.0% previously.