SHANGHAI/SINGAPORE: China’s yuan strengthened to a two-week high against the dollar on Thursday, underpinned by broad weakness in the greenback in global markets after the US Federal Reserve policy decision signalled a possible end to the rate tightening cycle.
The dollar was on the back foot after the Fed’s 25bps rate hike, which benefited other major currencies, including the Chinese yuan.
“Investors took a relief as the scope for further Fed-PBOC monetary divergence appears limited,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
“Additionally, the recent Politburo meeting has fuelled hopes for stimulus package.”
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.1265 per dollar, 30 pips firmer than the previous fix of 7.1295.
The central bank continued a weeks-long trend of setting the official midpoint firmer than market projections, seen by investors as a sign of authorities’ growing discomfort weakness.
Thursday’s official guidance was 203 pips stronger than Reuters’ estimate of 7.1468.
In the spot market, the onshore yuan opened at 7.1345 per dollar and strengthened to a high of 7.1192, the strongest level since July 14. By midday, it was changing hands at 7.1314, 57 pips firmer than the previous late session close.
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“The dollar’s movements should continue to guide the yuan in the near term,” said a trader at a foreign bank, adding markets will also closely gauge details of China’s stimulus measures to support the economy.
China’s top leaders pledged on Monday to step up policy support for the economy amid a tortuous post-COVID recovery, focusing on boosting domestic demand, signalling more stimulus steps.
“The July Politburo has historically been the platform for the government to take stock of economic performance in the first half of the year, and recalibrate its policy settings vis-a-vis the second half of the year,” said Carlos Casanova, senior economist for Asia at UBP.
“We expect that additional measures will be announced in the months ahead. Specifically, we are monitoring the PBOC’s balance sheet and can’t exclude a 25 bp reserve requirement ratio (RRR) cut in the third quarter of 2023.”
By midday, the global dollar index fell to 100.847 from the previous close of 100.887, while the offshore yuan was trading at 7.1303 per dollar.