Yuan rises despite latest PBOC measure to reduce capital inflows

SHANGHAI: The yuan edged higher against the dollar on Monday, as the market shrugged off the central bank's latest effort to stem the rise of the currency by reducing capital inflows.

Traders and analysts said the currency market did not immediately react to a decision by the People's Bank of China (PBOC) to lower a parameter on cross-border financing, although it was widely seen as an official attempt to slow the pace of the yuan rally.

The PBOC move could reduce China's overall size of foreign debt as the reduction would scale back the room Chinese companies have to borrow overseas.

The action was "intended to cool down the yuan's appreciation," CIB research said in a note.

"But it will be hard to shake the appreciation trend before any significant changes to the fundamentals," CIB added.

The onshore yuan opened at 6.5340 per dollar and was changing hands at 6.5391 at midday, 72 pips firmer than the previous late session close.

"The authorities remained unwilling to see rapid rises in the yuan," said a trader at a Chinese bank, adding the market still bet yuan strength in the mid- to long-run while consolidating at around 6.5 per dollar level in the near term.

"The macro recovery in China remains on-track, and garners market confidence. Path of least resistance for Chinese real yields remains higher on the back of both supported nominal yields and easing inflationary pressures," Terence Wu, strategist at OCBC Bank in Singapore, said in a note.

He expected these positive drivers to push the yuan higher in 2021.

Several traders said the market will pay close attention to developments in Brexit talks, which could affect major currencies.

Separately, a top decision-making body of the ruling Communist Party said on Friday that China will strive to keep economic operations "within a reasonable range" next year, as Beijing seeks to expand domestic demand and boost technology innovation.

Prior to the market opening, the PBOC set the midpoint rate at 6.5361 per dollar, 44 pips firmer than the previous fix of 6.5405.

The global dollar index rose to 90.787 at midday, when the offshore yuan was trading at 6.5248 per dollar.