SHANGHAI: China’s yuan strengthened against the dollar on Tuesday, underpinned by persistently firmer-than-expected central bank guidance, while sentiment improved after China’s sovereign fund pledged to support the stock market.
The yuan’s performance was largely affected by the stock market moves recently, traders said, adding investor sentiment quickly lifted after Central Huijin Investment said it would further increase investments in exchange-trade funds (ETFs) to safeguard stable capital market operations.
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 a more than one-week low of 7.1082 per dollar, 12 pips weaker than the previous fix of 7.1070.
While the fixing was slightly weaker, the central bank continued its months-long practice of setting the official guidance at levels that are firmer than market projections. That is widely seen by traders as an attempt to keep the currency stable.
“PBOC continued to deploy the same old playbook of using the daily RMB fix to manage RMB expectations,” Christopher Wong, FX strategist at OCBC Bank, said in a note.
Tuesday’s midpoint was 975 pips firmer than a Reuters estimate of 7.2057.
The strengthening bias in the official guidance rate limited the yuan’s losses against the greenback, compared with other non-dollar currencies, resulting in a higher value against its trading partners, traders said.
The CFETS basket index, a gauge that measures the yuan’s strength against a basket of currencies, gained 1.93% this year to 99.3 on Tuesday, the highest since Nov. 2, according to Reuters calculations based on official data.
In the spot market, the onshore yuan opened at 7.1958 per dollar and was changing hands at 7.1978 at midday, 10 pips firmer than the previous late session close.
Apart from the strengthening bias in the official yuan midpoint, major state-owned banks were seen actively selling dollars for yuan in the onshore spot foreign exchange market on Tuesday, two people with knowledge of the matter said.
The sources said state banks were keen to defend the 7.2 yuan per dollar level before the week-long Lunar New Year holidays, which will start on Feb. 10.
State banks often act on behalf of China’s central bank in the foreign exchange market, but they could also trade on their own behalf or execute client orders.
By midday, the global dollar index fell to 104.393 from the previous close of 104.452, while the offshore yuan was trading at 7.2125 per dollar.