China's yuan firms as dollar dips ahead of Yellen testimony

SHANGHAI: China's yuan firmed from two-week lows on Tuesday, edging higher on a weaker dollar as global investors await clarity on the policies of the incoming administration of US President-elect Joe Biden.

The US dollar index was off a one-month high at 90.668 ahead of the Senate testimony on Tuesday of US Treasury Secretary nominee Janet Yellen.

Yellen will say that the United States does not seek a weaker dollar, the Wall Street Journal reported, although analysts expect US central bank policy to nonetheless drag on the dollar.

On Tuesday, the People's Bank of China (PBOC) set the midpoint of the yuan's daily trading band at 6.4883 per dollar prior to market open, its weakest level since Jan. 4, after the yuan finished its previous onshore session at two-week lows.

Spot yuan opened at 6.4899 per dollar and firmed to 6.4868 by midday, 53 pips stronger than Monday's late session close. The offshore yuan firmed to 6.4925 per dollar, from a close of 6.4960.

In addition to the weaker dollar, traders said tight market liquidity had also helped to push the onshore currency higher, though they expect the PBOC to conduct liquidity injections to stabilise sentiment ahead of next month's Lunar New Year holiday.

The central bank injected a net 75 billion yuan ($11.6 billion) into the banking system on Tuesday, its largest such injection this year, after interbank borrowing rates spiked on Monday.

On Tuesday, the overnight tenor of the Shanghai Interbank Offered Rate (SHIBOR) rose to 2.236%, its highest since Nov. 16.

"In the near term, the yuan will continue to follow fluctuations in the dollar. Signs of an independent trend are still not clear," said a trader at a Chinese bank.

But the yuan is widely expected to rise in 2021 after the country posted firm fourth-quarter growth figures on Monday, giving authorities more leeway to pursue policy tightening.

Carlos Casanova, senior Asia economist at Union Bancaire Privee in Hong Kong, said he expected authorities to continue to focus on financial deleveraging in 2021, leading to wider nominal spreads between Chinese and US debt.

"(Deleveraging) is supportive of a gradual yuan appreciation trajectory, as that positive differential with the US continues to attract inflows into Chinese asset classes," he said.

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 6.6285 on Tuesday.