China's yuan on course for 3rd weekly gain, investors await Q3 GDP

15 Oct, 2021

SHANGHAI: China's yuan inched higher against the dollar on Friday and looked set for a third straight weekly gain, as investors awaited key economic data due next week for more clues on the policy outlook.

While growth momentum is clearly slowing, compounded by recent widespread power shortages, traders said investors were unwilling to make huge bets on either side of the yuan before China's September and Q3 GDP data next Monday.

Premier Li Keqiang said this week that China has ample tools to cope with economic challenges despite slowing growth, and the government is confident of achieving full-year development goals.

Yuan nears 1-month high

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4386 per dollar, 28 pips firmer than the previous fix of 6.4414, the strongest since Sept. 16.

In the spot market, onshore yuan opened at 6.4350 per dollar and was changing hands at 6.4361 at midday, 43 pips firmer than the previous late session close.

If the yuan finishes the late night session at the midday level, it would have gained 0.12% to the dollar for the week.

Traders said slight strength in the yuan on Friday morning came after the central bank fully rolled over maturing medium-term loans, without adding more cash into the financial system or adjusting the interest rate.

The steady borrowing cost of medium-term lending facility (MLF) eased market fears of a possible shrinkage in the yield gap between China and the United States, said a trader at a Chinese bank.

A narrowing yield premium could prompt capital outflows from China and add depreciation pressure on the yuan.

Still, investors heatedly discussed whether the Chinese central bank would further ease its monetary settings to support the economy, with some citing risks of stagflation.

"Bigger tranches of MLF maturity in Nov-Dec as well as tax payments due could mean this is the right time for a broader based reserve requirement ratio (RRR) cut, especially given the weaker credit growth in September," analysts at Maybank said in a note.

A total of 1.95 trillion yuan worth of MLF loans are set to expire in the rest of the year, and some market analysts expect tax payment could hit 1.4 trillion yuan this month.

"Despite weaker economic momentum, we expect the CNY's strength to carry on for longer, supported by continued strong fundamentals and likely less confrontational relations between the US and China," analysts at Standard Chartered said in a note.

"Exports will likely stay at record highs, if not rise further, in Q4, as indicated by a continued rise in shipping container costs," they said, expecting the yuan to trade in a range of 6.4 to 6.6 in the final three months of the year.

US Trade Representative Katherine Tai said on Thursday that her talks with China's Vice Premier Liu He got off to a "good start" last week and that she planned to raise Beijing's non-compliance with Phase 1 trade deal in future discussions.

By midday, the global dollar index fell to 93.94 from the previous close of 94.041, while the offshore yuan was trading at 6.435 per dollar.

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