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China's yuan touches two-week high after Fed appears less hawkish than expected

China's yuan touches two-week high after Fed appears less hawkish than expected

Reuters · 07/28/2022 01:04
China's yuan touches two-week high after Fed appears less hawkish than expected

- China's yuan touched a two-week high on Thursday, as the central bank lifted the official guidance by the most in six weeks to reflect broad dollar weakness after comments from the U.S. Federal Reserve appeared to be less hawkish than expected.

The U.S. central bank delivered another 75-basis-point rate hike at the end of its July policy meeting on Wednesday, and Fed Chair Jerome Powell that although the labour market remained strong, other economic indicators have softened.

"The market appears to have taken the development as confirmation of its recent pricing about the future pace of Fed hikes, even though Powell left the door open to another 'unusually large' rate hike in the meeting," said Alvin Tan, strategist at RBC Capital Markets.

Prior to the market's open, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at 6.7411 per dollar, 320 pips or 0.47% firmer than the previous fix 6.7731.

Thursday's fix was the strongest level for the yuan in two weeks, and the biggest strengthening in percentage terms since June 16.

The firmer midpoint lifted the spot market higher. The onshore yuan CNY=CFXS opened at 6.7534 per dollar and surged to a high of 6.7175, the strongest since July 13.

By midday, it was changing hands at 6.7473, 127 pips stronger than the previous late session close.

Traders said the yuan was mostly reacting to the soft dollar in morning deals, but some saw little upside room as the higher U.S. yields capped the strength in the local currency.

China, along with Japan, has been a major outlier in the global tightening spree. Mary Xia, strategist at UBS said Beijing's monetary policy stance would mainly focus on domestic macro situations.

"The to inject more liquidity or cut the amount of cash banks must set aside as reserves is huge ," Xia said.

She expects market rates and yield on China's government bonds to mildly rise in the remainder of this year, and the yuan to trade at 6.9 per dollar at end-December.

The PBOC has adopted a cautious approach to cash offerings this month due to ample liquidity conditions in the financial system. And a further widening in monetary policy stance with the United States could risk capital outflows and yuan depreciation.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, said domestic factors including COVID-19 developments have become more important driver for the market.

"In the rest of this year, the headwinds of COVID spread and the property market rout are likely to keep the CNY under pressure," Cheung said, expecting a steady yuan with downside bias.

The market barely reacted to a Financial Times report that China will help property developers by issuing 1 trillion yuan in loans for stalled developments.

The yuan market at 0404 GMT:


ONSHORE SPOT:

Item

Current

Previous

Change

PBOC midpoint CNY=SAEC

6.7411

6.7731

0.47%

Spot yuan CNY=CFXS

6.7473

6.76

0.19%

Divergence from midpoint*

0.09%

Spot change YTD



-5.81%

Spot change since 2005 revaluation


22.66%


Key indexes:

Item

Current

Previous

Change

Thomson Reuters/HKEX CNH index



0.0

Dollar index

106.287

106.452

-0.2




*Divergence of the dollar/yuan exchange rate. Negative indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.


OFFSHORE CNH MARKET

Instrument

Current

Difference from onshore

Offshore spot yuan CNH= *

6.7454

0.03%

Offshore -deliverable forwards CNY1YNDFOR= **

6.7007

0.60%


*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since -deliverable forwards are settled against the midpoint. CNY=SAEC.


(Reporting by Winni Zhou and David Stanway; Editing by Simon Cameron-Moore)

((winni.zhou@thomsonreuters.com; +86 21 2083 0100; Reuters Messaging: winni.zhou.thomsonreuters.com@reuters.))