Yuan inches up as US yield advantage narrows slightly

SHANGHAI: China’s yuan inched up against the dollar on Monday, underpinned by a narrowing US 10-year yield advantage versus its Chinese counterpart.

Currency traders and investors usually use the yield gap between the world’s two largest economies as a key indicator of relative value of the two respective currencies.

The yield gap between the benchmark 10-year Chinese bonds and Treasuries narrowed to -3 basis points from roughly -15 bps last week, as US bond prices rose amid worries over a global recession.

In forwards market, the benchmark one-year dollar/yuan swaps bounced to a three-week high of -182.5 points, from -280 points on Friday.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.7071 per dollar, 208 pips or 0.3% weaker than the previous fix 6.6863.

In the spot market, onshore yuan opened at 6.7010 per dollar and was changing hands at 6.6921 at midday, 99 pips firmer than the previous late session close.

Traders said the strength in the yuan on Monday also came as the PBOC made the smallest daily cash injection through open market operations in 1-1/2 years, resulting in a net withdrawal of 97 billion yuan ($14.50 billion)for the day.

Analysts and traders said the cautious liquidity stance suggested that the central bank was keen to tamp down any excess build-up in leverage.

As recent waves of local COVID-19 outbreaks were largely under control, “monetary policy has returned to normal from a crisis response mode,” said Ming Ming, chief economist at CITIC Securities.

The PBOC had a strong easing bias by offering 350 billion yuan on a net basis in the last two weeks, when banks and corporates had higher cash demand ahead of the half-year end.

Separately, market participants welcomed the planned “Swap Connect” launch between China and Honk Kong in six months, allowing mutual access to interest rate swap trading initially, to promote financial derivatives markets on both sides.

“This would increase the attractiveness of onshore China bonds to overseas investors by expanding their risk management tools,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

By midday, the global dollar index fell to 105.132 from the previous close of 105.138, while the offshore yuan was trading at 6.6918 per dollar.