SHANGHAI: The onshore yuan weakened against the dollar on Thursday after China’s consumer price data suggested soft demand and a fragile economic recovery, increasing the likelihood of further monetary easing.

The yuan’s offshore counterpart held steady.

China’s consumer price index (CPI) slipped back into deflationary territory and factory-gate prices kept falling in October, suggesting China’s economic recovery remains fragile due to downward pressures on demand.

Analysts at Citi said the CPI print could increase the chance of further monetary easing by the People’s Bank of China (PBOC) next week.

Citi’s economists held onto expectations for another 25-basis-point reserve requirement ratio (RRR) cut by the year-end.

China’s yuan firms as US rates uncertainty drags on dollar

Prior to the market’s opening, the PBOC set the daily midpoint rate at 7.1772 per US dollar - the yuan’s firmest level since Sept. 27.

The spot yuan opened at 7.2738 per dollar and was changing hands at 7.2833 at midday, 85 pips weaker than the previous late session close and 1.48% away from the midpoint.

The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day.

While the onshore yuan weakened, the offshore yuan held steady against a softening dollar.

“Implied volatilities of the dollar-offshore yuan pair through the nine-month tenor is plumbing fresh lows of the year amid the PBOC’s effective pegging of the onshore yuan,” Alvin Tan, head of Asia FX strategy at RBC Capital Markets said.

The offshore yuan was trading at 7.2875 per dollar, 10 pips firmer than prior day’s closing.

The global dollar index fell to 105.525 from the previous close of 105.593.