SHANGHAI: China’s yuan rose to a more than one-week high against the dollar on Monday, supported by Beijing’s decision to keep benchmark lending rates unchanged to avoid further divergence in monetary policy against other economies.
China stood pat on its benchmark lending rates for corporate and household loans, with global central banks’ rate increases making it tough for authorities to stimulate a weak domestic economy by lowering rates.
“The pause of China’s rate cut cycle helped alleviate concern over further Fed-PBOC monetary policy divergence widening imminently and should help anchor the RMB exchange rate at around 6.70 handle,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
China’s yuan firms to one-week high, but dollar rise caps gains
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.712 per dollar, 197 pips or 0.3% weaker than the previous fix of 6.6923.
In the spot market, onshore yuan opened at 6.7030 per dollar and rose to a high of 6.6738, the strongest level since June 9. By midday, it was changing hands at 6.6772, 401 pips firmer than the previous late session close.
If the yuan retains its more than 0.6% intraday gain at the late night close, it would mark the biggest daily percentage increase in a month.
Currency traders said the yuan received some support from the steady loan prime rate (LPR) fixing, while others said the dollar’s performance could continue to guide the yuan, with markets paying close attention to Federal Reserve Chair Jerome Powell’s testimony before the Senate and the House later this week.
Some analysts expect China’s central bank to resume monetary easing to support the COVID-hit economy in the remainder of this year.
“While the Fed and other central banks are combating cancer like inflation, I see the PBOC believes the inflation will be comfortably below the policymakers’ 3% level target in the next two quarters,” said Marco Sun, chief financial market analyst at MUFG Bank.
Sun expects the central bank to lower its medium-term policy rate by 10 basis points this year and guide one-year LPR lower by the same margin during the rest of the year.
By midday, the global dollar index had fallen to 104.376 from the previous close of 104.7, while the offshore yuan was trading at 6.6738 per dollar.