SHANGHAI: China's yuan firmed on Monday as demand for foreign exchange settlement continued to offer support, but a slightly weaker-than-expected daily fixing by the central bank indicated its continued unease with a strong currency.
The People's Bank of China (PBOC) set the yuan's daily midpoint at 6.3669 per dollar prior to market open, firmer than the previous fix of 6.3702, but weaker than an expected fixing of 6.3606.
The softer-than-expected midpoint comes two days before banks will be required to hold more foreign exchange in reserve. The PBOC's announcement of a hike in banks' foreign exchange reserve requirements knocked the yuan off a 3-1/2 year high last week.
Traders said the market was balancing those strong policy signals against real demand.
"There's still quite a lot of FX settlement demand, but the policies are out and should affect sentiment with more dollar purchasing," said a trader at a Chinese bank. "I don't know how long the policy effect will last."
Spot yuan opened at 6.3652 per dollar and firmed to 6.3622 by midday, 78 pips stronger than Friday's late-session close but off earlier highs. The offshore yuan strengthened to 6.3655 per dollar from Friday's close of 6.3767.
In a note, analysts at HSBC said that the foreign exchange reserve requirement ratio hike and the softer fixings were consistent with regulators' view that the yuan's appreciation had "been a little over-extended", first indicated in a meeting on Nov. 19 chaired by PBOC and SAFE officials.
That meeting noted that the yuan would fluctuate in both directions, suggested companies neutralise FX risks and exposures, and warned against speculation.
Despite moves to rein in the yuan, "the RMB is supported by a large current account surplus and portfolio inflows," the HSBC analysts said, adding that they expect the dollar-yuan pair to stabilise in the near term.
A broad dollar index rose to 96.175 from the previous close of 96.104.
Market participants will also closely watch US monetary policy for clues as to the direction of the dollar, which is expected to guide the yuan in the medium-term.
The Federal Reserve is widely expected to signal a quicker tapering of asset purchases this week, and an earlier start to rate hikes.
That contrasts with an easing bias in China, especially after the Central Economic Work Conference signalled a focus on stabilising the economy in 2022.
"The policy meetings show a clear policy pivot. After a year-long regulatory tightening, policy priority has shifted to supporting growth," said Larry Hu, an economist at Macquarie Capital.