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China's yuan edged up against the dollar on Tuesday, bouncing off a nearly four-month low hit the previous day helped by a slightly firmer midpoint and as the greenback's rally paused. Traders said that although the yuan gained from the dollar's consolidation and some corporate selling of the greenback, many investors remained bullish on the US currency.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3799 per dollar, 53 pips or 0.08 percent firmer than the previous fix 6.3852. In the spot market, the onshore yuan opened at 6.3756 per dollar and was changing hands at 6.3756 at midday, 53 pips firmer than the previous late session close and 0.07 percent stronger than the midpoint.
The yuan traded in a thin range of around 55 pips, with trading volume contracting to $10.626 billion as of midday. Volume over the whole day was 31.082 billion on Monday A trader at a foreign bank in Shanghai said the dollar's rally might not be ending anytime soon and he expects the dollar index to rebound and drag the yuan lower to test 6.4 in the near term.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 98.87, firmer than the previous day's 98.83. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.4607, 1.25 percent weaker than the midpoint.
The dollar traded below a five-month peak on Tuesday, consolidating gains after a broad rally underpinned by rising US bond yields and an easing of US-China trade tensions. The global dollar index, a gauge that measures the unit's strength against a basket of six major currencies, stood at 93.58 at midday, down from a five-month high of 94.058 set on Monday.
Some market participants attributed Tuesday's gains in the yuan to a rise in its offshore counterpart, as demand for the renminbi had picked up offshore amid China's continuing efforts in opening up its financial markets to attract foreign buying of yuan-denominated assets. The offshore yuan was trading 0.22 percent stronger than the onshore spot at 6.3615 per dollar. MSCI, the US index publisher, will include 234 Chinese large cap stocks in its global and regional indexes on June 1, setting the stage for capital markets in the world's second-biggest economy to get a boost from a potential surge of foreign money.
Zhang Ming, chief economist at Ping An Securities expects the yuan to trade in a median range of 6.3 to 6.4 per dollar for the rest of the year. He added the yuan could firm to 6.2 and also ease to 6.6 per dollar. "Going forward, with a slowdown in the Chinese economy, a shrinking yield gap between the United States and China and a rebound in the dollar index, chances for the Chinese yuan to mildly weaken are higher than to appreciate," Zhang said in a note, adding however that even if the yuan depreciates, the fall would be manageable.

Copyright Reuters, 2018

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