Yuan eases as US vaccination progress props up dollar

SHANGHAI: China's yuan eased against the dollar on Monday, as the rapid US coronavirus vaccine rollout strengthened recovery prospects in the world's largest economy, lifting the greenback.

The dollar began the week on a strong footing, helped by optimism about the US economy as the number of people receiving vaccination shots hit 94 million people, far outpacing Europe's rollout.

The firmer dollar led China's central bank to guide the yuan lower, with spot prices following suit.

Prior to market opening, the People's Bank of China (PBOC) set the yuan midpoint rate at a three-month low of 6.5416 per dollar, 40 pips or 0.06% weaker than the previous fix of 6.5376.

In the spot market, the onshore yuan opened at 6.5415 per dollar and was changing hands at 6.5441 at midday, 23 pips weaker than the previous late session close.

Traders said the yuan largely tracked the dollar's movements in global markets as investors closely monitor details of the US fiscal stimulus to the economy to gauge its impact on major currencies.

"RMB index continued to consolidate around 97 level sending USD/CNY to fluctuate with the broad dollar movement. This trend is likely to continue for a while," Tommy Xie, head of Greater China research at OCBC Bank said in a note.

China's trade-weighted yuan basket index stood at 97.15 as of Friday, according to official data, and was up 2.4% so far this year, whereas the spot yuan weakened 0.24% against the dollar.

Many analysts and market watchers said they have revised down their yuan forecasts, as US yields moved in the dollar's favour and China's economic outperformance set to diminish.

"China's economy is now well above trend and, with policy stimulus being withdrawn, is on course for a cyclical slowdown that isn't reflected in consensus expectations," said Julian Evans-Pritchard, senior China economist at Capital Economics.

"At the same time, the outlook for the rest of the world has brightened thanks to large-scale fiscal stimulus in the US and the successful development and rollout of multiple vaccines."

Evans-Pritchard expects the yuan to weaken to 6.70 per dollar by year-end and 6.90 by end-2022, downgraded from 6.20 for both years in the previous forecast.

Separately, another near-term market focus would be FTSE Russell's review on adding Chinese government bonds to its flagship World Government Bond Index (WGBI) this week.

Assuming a 6% weighting in the index, HSBC fixed income research expected inflows of $150 billion during the inclusion process, the bank said in a note.

The global dollar index stood at 92.781 as of midday, while the offshore yuan was trading at 6.5446 per dollar.