China's yuan eased against the dollar on Wednesday, following the central bank's weaker midpoint and a firmer greenback ahead of the US Federal Reserve's policy decision. The Fed, to conclude its two-day meeting later on Wednesday, is expected to deliver an interest rate hike and investors will be watching for clues on the pace of further tightening in the United States this year.
Market watchers believe the People's Bank of China (PBOC) will likely follow suit by raising its key money market rates on Thursday, while keeping benchmark interest rates unchanged, as it did in previous rounds of Fed rate increases. "The PBOC will likely follow the Fed with a 5-basis-point increase in interbank borrowing costs," Nathan Chow, senior economist at DBS Group Research said in a note on Wednesday.
Such a move will prevent the interest rate yield gap between United States and China from shrinking further, he added. Prior to market opening on Wednesday, the PBOC set the midpoint rate at 6.4156 per dollar, 35 pips weaker than the previous fix of 6.4121.
In the spot market, the onshore yuan opened at 6.4097 per dollar, and traded in a tight range of around 60 pips before changing hands at 6.4048 at midday, 8 pips weaker than the previous late session close. Trading volume shrunk to $10.061 billion as of midday, compared with a normal half-day volume of about $15 billion.