Yuan firms on tightening outlook, volume shrinks ahead of holiday

SHANGHAI: China's yuan inched up on Monday, tracking a broadly weaker US dollar in global markets amid expectations of policy tightening, while trading thinned ahead of the Lunar New Year holiday.

Chinese financial markets will shut for the week-long holiday from Thursday, and corporates usually convert their dollars into yuan for various payments ahead of the break.

"Given the strong interest in RMB-denominated assets and seasonal demand for RMB ahead of Chinese New Year holiday from corporates, market remained sell the USD/CNY on rally mode," Tommy Xie, head of Greater China research at OCBC Bank, said in a note.

"The stable USD/CNY has sent the RMB index to test a multi-year high of 97 amid a rebound in the dollar index. We think 98 could be the resistance for the RMB index in the near term."

The onshore yuan opened at 6.4640 per dollar and was changing hands at 6.4575 at midday, 89 pips firmer than the previous late session close.

Official data showed that CFETS RMB index, a gauge that measures the yuan's value against its major trading partners, rose to 96.95 as of Friday, the highest since June 2018.

Some analysts and traders said the market has become increasingly wary about the higher CFETS index, as the authorities are widely believed to be keen to maintain China's export competitiveness.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4678 per dollar, 32 pips or 0.05% firmer than the previous fix of 6.471.

Trading volume shrunk to $12.3 billion as of midday, down from a normal half-day volume of around $15 billion.

Expectations for a possible shift to a tighter policy stance in China as the economy recovers from the pandemic-led slowdown also supported the yuan and swap curve in the forward market.

The central bank's preference to inject small amounts of cash on a net basis through open market operations instead of offering high profile funds as it normally does before major holidays, has fuelled speculation that it could maintain a tightening bias after the break.

The benchmark one-year dollar/yuan swap points rose to 1,683 points on Monday morning, the loftiest level since Dec. 4, 2020.

In global markets, the dollar nursed losses against most currencies in subdued trade as disappointing US jobs data caused some investors to scale back bets on a rebound in the greenback.

By midday, the global dollar index traded at 91.06 while the offshore yuan was at 6.4531 per dollar.