China's yuan firms, market shrugs off huge cash injection

SHANGHAI: China's yuan firmed against the US dollar on Tuesday after the official midpoint was fixed at a near seven-month high, shrugging off the central bank's huge cash injection into the financial system, traders said.

The People's Bank of China (PBOC) injected 498 billion yuan ($73.27 billion) on Tuesday morning, exceeding the 431.3 billion of medium-term lending facility loans maturing this month. The PBOC is trying to maintain adequate liquidity while keeping a tight leash on speculative lending.

The central bank set the midpoint rate at 6.7934 yuan per dollar prior to market open, the strongest since Nov.10 last year. The previous fix was 6.7935 yuan per dollar.

In the spot market, the yuan opened at 6.7982 per dollar and was changing hands at 6.7984 at midday, 62 pips firmer than the previous late session close but 0.07 percent weaker than the midpoint.

Traders said expectations for depreciation of the yuan had faded after the currency's recent surge, but companies still looked to buy dollars at cheap rates.

Last week was the yuan's best week since February 2016, as it gained 0.65 percent against the dollar - a sizable leap for a currency that normally trades in a wafer-thin range.

One trader at a Chinese bank added that June is a typical peak period for dollar demand.

Foreign firms usually start to repatriate profits overseas in June and domestic firms begin to purchase dollars to square books ahead of the quarter-end.

Foreign exchange strategists at HSBC said on Tuesday that they did not believe the yuan would not have another period of "extraordinary stability and low volatility" as seen between March and early May.

"Rather, the authorities appear ready to introduce more two-way flexibility in the exchange rate around recent levels," they said in a note.

Separately, Ray Dalio, the billionaire founder of the world's largest hedge funds manager Bridgewater Associates, said on his twitter account that he thought it was "a smart move" for the Chinese policymakers to squeeze the shorts in its currency.

"(The move) demonstrates the Chinese government's power," Dalio wrote, "discourages those who would lose confidence in its currency (in turn lessening the desire to sell the yuan), which helps stabilize the balance of payments and currency."

He added that the latest move also "produces a tightening that works well in conjunction with tighter monetary policies to tighten credit".

Market players were awaiting May foreign exchange reserves data, due for release on Wednesday, to guage how authorities were faring in efforts to stem capital outflows.

The global dollar index fell to 96.64 from the previous close of 96.799.

The offshore yuan was trading 0.39 percent firmer than the onshore spot at 6.7718 per dollar.

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 6.9565, 2.34 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.