SHANGHAI: China's yuan held steady against the dollar on Thursday on persistent seasonal corporate demand and a much strengthened official midpoint fixing, with only a muted impact from cuts to the country's benchmark lending rates.
Prior to market opening, the People's Bank of China (PBOC) raised the midpoint rate to 6.3485 per dollar, 139 pips firmer than the previous fix of 6.3624 and the strongest since May 2018.
The official guidance was largely in line market projections - just 3 pips weaker than Reuters' estimate - unlike the huge deviations seen in recent weeks.
Pre-holiday demand supports yuan as China signals more easing
The central bank's official fixings have been persistently weaker than market forecasts since mid-November, which markets interpreted as a sign that the PBOC was getting increasingly uncomfortable with rapid yuan gains.
Traders said a rise past the psychologically important 6.35 per dollar setting also suggested the central bank was refraining from imposing more weakening bias via its midpoint setting. Last year, the authorities rolled out measures to curb excess yuan gains when the yuan crossed that level.
In the spot market, the onshore yuan opened at 6.3450 per dollar and was changing hands at 6.3435 at midday, 12 pips firmer than the previous late session close.
Traders said rising market expectations for a widening monetary divergence between China and the United States are unlikely to affect the strong yuan ahead of the long Lunar New Year holiday, which starts on Jan. 31, as companies have to convert their FX receipts into the Chinese currency regardless of exchange rate losses.
Companies usually have to make payments such as bonuses to employees ahead of the year's most important festival in China.
Meanwhile, Beijing stepped up its monetary easing efforts to prop up a slowing economy this week by lowering a set of key policy rates and cutting a mortgage reference rate for the first time in nearly two years on Thursday.
Market are prepared for further moves before growth bottoms out.
An easing bias added pressure to the yield premium between the world's two largest economies, as the Federal Reserve is set to raise interest rates as early as March.
"The Fed's sooner and faster tightening cycle will crowd out PBOC's policy room for easing later this year, and RMB will be subject to depreciation risk," Ken Cheung, chief Asian FX strategist at Mizuho Bank.
Cheung expects the PBOC to front-load its easing measures in the first half of the year, with more rate cuts and a reduction in banks' reserve requirement ratio in the first quarter.
By midday, the global dollar index had risen to 95.544 from the previous close of 95.51, while the offshore yuan was trading at 6.3479 per dollar.