SHANGHAI: China’s yuan inched lower against the dollar on Tuesday, as investors waited on a key U.S. inflation report and a string of domestic economic data that could give some steer on the monetary policy outlooks in the world’s two largest economies.
Widening U.S.-China interest rate differentials and policy divergence between the two countries have been one of the crucial factors boosting the U.S. dollar and dragging on the Chinese yuan in recent years.
The Chinese yuan has steadied this week but is within a whisker of a 4-1/2 month low of 7.2364 it struck on April 3, despite the central bank’s firmer daily benchmark settings. The currency is down about 1.9% against the dollar this year.
Prior to the 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 7.0956 per dollar, 9 pips weaker than the previous fix of 7.0947. But it was 1,292 pips firmer than a Reuters estimate of 7.2248.
“RMB has been stable, with USD/CNH holding around 7.25 for the last two weeks,” Chang Wei Liang, FX & credit strategist at DBS, said in a note.
Yuan weakens slightly against dollar
“The PBOC has continued to set a string of strong USD/CNY fixings around 7.09,” he said, adding that U.S. Treasury Secretary Janet Yellen’s visit to “China had also been a cordial one, though she raised difficult issues on China’s excess capacity and the threat it poses to producers in the U.S. and other countries.”
In the spot market, the onshore yuan opened at 7.2307 per dollar and was changing hands at 7.2342 at midday, 37 pips weaker than the previous late session close.
“Markets will closely gauge the upcoming economic data,” said a trader at a foreign bank, referring to China’s inflation, trade and credit lending data due later this week.
China is also due to report its first quarter gross domestic product (GDP) data and activity indicators next week.
Some currency traders also pointed out that the losses in the yuan were capped by liquidity tightness in Hong Kong, where offshore yuan overnight HIBOR - a gauge that measures offshore yuan liquidity conditions - jumped to a two-year high of 6.31955% on Tuesday.
Rises in the offshore yuan’s funding costs make it more expensive for some investors to short the yuan.
By midday, the global dollar index rose to 104.168 from the previous close of 104.14, while the offshore yuan was trading at 7.2448 per dollar.