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SHANGHAI: China's yuan weakened in thin trade on Wednesday as investors awaited clearer signals on U.S.

China trade talks and monetary policy decisions from major global central banks.

Trading volumes remained low, standing around $6.8 billion at midday, well below Tuesday's midday volume of $10.131 billion. Monday saw the slowest trading session since early February, when investors celebrated China's Lunar New Year holiday.

Before the market open, the People's Bank of China (PBOC) set the midpoint rate at 6.886 per dollar, weaker than the previous fix of 6.8818.

In the spot market, the yuan opened at 6.8811 per dollar and was changing hands at 6.8821 at midday, 27 pips weaker than the previous late session close.

Amid growing speculation that China could follow a much anticipated rate cut by the U.S. Federal Reserve next week, PBOC Governor Yi Gang said on Tuesday that China's current interest rate level is appropriate.

Yi added that the PBOC's decision on whether or not to move after the Fed depended on domestic conditions. "Cutting interest rate will mainly deal with the danger of deflation, but price changes in China remain moderate," he said in an interview with financial magazine Caixin.

Despite Yi's comments, markets are still holding their breath ahead of the Fed's July 31 decision, said one trader at a Chinese bank in Shanghai, noting both corporate clients and traders' proprietary accounts were maintaining their positions.

Policy sources have told Reuters that China sees aggressive actions like interest rate cuts as a last resort if the damaging U.S.-China trade war takes a sharp turn for the worse, but that it is keeping all its economic policy tools within reach.

On trade, White House economic adviser Larry Kudlow on Tuesday said it was a good sign that top U.S. officials would be traveling to China to discuss reviving stalled talks, and said he expected Beijing to start buying U.S. agriculture products soon. But that was not enough to revive the soporific yuan market.

Tommy Xie, an economist at OCBC Bank in Singapore, said the stability in the yuan's exchange rate in recent weeks was "quite unusual", particularly given volatility in the U.S. dollar index ahead of rate decisions by the Fed and the European Central Bank. But he added investors could be waiting for more details on the U.S.-China trade talks.

The ECB holds a policy meeting on Thursday, at which it is expected to cut interest rates, or at least pave the way for easing in the near future, while the Fed is expected to lower rates by 25 basis points at its July 30-31 meeting.

The global dollar index, which measure the greenback against a basket of major rivals rose to 97.749 from the previous close of 97.705.

Xie added that China might prefer a stable yuan ahead of the talks.

"If (the yuan) weakens, it may not be good for China in terms of the trade talks, and there might be potentially some pressure from Trump side to stabilise the renminbi," Xie said, using another name for the currency.

Copyright Reuters, 2019