SHANGHAI: China’s yuan held steady against a weakening US dollar, as US yields slipped after Federal Reserve Chair Jerome Powell’s comments reinforced market expectations for rate cuts.
Powell said on Thursday the US central bank was “not far” from gaining the confidence it needs in falling inflation to begin cutting interest rates.
The 10-year Treasury yield dropped below 4.1% overnight, with the dollar index down to its lowest in nearly two months on Friday.
Meanwhile, the rally in China’s long-dated bonds is cooling after the country’s central bank said it is surveying some rural lenders’ bond investments.
Recent trading volume for China’s spot yuan remained light, with traders citing a lack of direction as the yuan continued to loiter below 7.2 against the dollar.
Trading volume for the first five trading sessions in March averaged $23.2 billion.
That compares with an average daily volume of $34.5 billion in January and $27 billion in February.
Market participants are awaiting US payroll data due later in the day to gauge the Fed’s policy path, and China’s inflation print due on Saturday.
Prior to the market’s 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 7.0978 per US dollar. That was the strongest since Jan. 2 and more than 850 pips firmer than Reuters’ estimate of 7.1863.
China’s yuan steadies as dollar slips, but pressure remains
The spot yuan opened at 7.1884 per dollar and was changing hands at 7.1923 at midday, 8 pips firmer than the previous late session close.
“Chinese authorities face challenges from the impossible trinity, as they try to keep RMB stable while maintaining an easing monetary policy stance and allowing semi-porous capital flows,” Nomura said in a report.
With the outlook for the economy still weak, despite the government’s ambitious 2024 growth target, Nomura analysts said the PBOC will eventually have to allow for FX stability, or risk running down its FX reserves.
China set a GDP goal of 5% at this week’s annual meeting of the National People’s Congress.
The global dollar index was a touch softer at 102.819 from the previous close of 102.823.
The offshore yuan was trading 91 pips weaker than the onshore spot at 7.2014 per dollar.