SHANGHAI: China’s yuan inched higher against the dollar on Tuesday, reflecting falling US Treasury yields overnight, but the gains in the Chinese currency were capped by rising bets for further monetary easing in the world’s second-largest economy.
Traders were also cautious ahead of the outcome of the Federal Reserve policy meeting on Wednesday, where rates are expected to be held steady with the focus squarely on the outlook.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1055 per dollar, 42 pips firmer than the previous fix of 7.1097.
The central bank’s months-long practice of setting the official guidance rate at firmer levels than the market’s projections is widely seen by traders as an attempt to keep the currency stable.Tuesday’s midpoint was 708 pips firmer than a Reuters estimate of 7.1763.
In the spot market, the onshore yuan opened at 7.1779 per dollar and was changing hands at 7.1778 at midday, 32 pips firmer than the previous late session close.
“The yuan is likely to trade in narrow range for the time being,” said a trader at a Chinese bank, noting market participants will closely monitor the upcoming Fed policy meeting for any clues on the US monetary trajectory that can affect the dollar and other major currencies.
The Fed’s policy announcement is due on Wednesday, and markets widely expect it to stand pat on rates, leaving the spotlight on Fed Chair Jerome Powell’s comments.
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Separately, some yuan traders said they will pay close attention to China’s January manufacturing data due on Wednesday to gauge the domestic economic conditions.
A Reuters poll showed that the manufacturing activity in January likely shrank for the fourth month, indicating the country’s sprawling sector was still struggling to regain momentum at the start of 2024.
“Markets are still on the lookout for more support measures, in particular targeting consumption, rate cuts,” Christopher Wong, FX strategist at OCBC Bank, said in a note.
“However, absence of new measures in due course can be a setback on earlier-announced measures. This will further weigh on sentiments.”
By midday, the global dollar index was down at 103.452 from the previous close of 103.609, while the offshore yuan was trading at 7.1879 per dollar.