Yuan flat before Fed outcome, wary on Huarong developments

SHANGHAI: China's yuan was largely steady against the dollar on Tuesday as most investors were reluctant to make any bets before the outcome of the US Federal Reserve's policy meeting due later this week.

While the Fed is not expected to alter policy at its two-day meeting which ends on Wednesday, the focus will be on comments from Chairman Jerome Powell as he's likely to face questions over whether improving conditions warrant a withdrawal of monetary easing.

Some market participants say developments around Chinese state-owned bad loan giant China Huarong Asset Management Co have also lent a cautious air to yuan trading.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4924 per dollar, 11 pips weaker than the previous fix of 6.4913.

In the spot market, the onshore yuan opened at 6.4830 per dollar and then swung between gains and losses before changing hands at 6.4867 at midday, 2 pips weaker than the previous late session close.

Activity was mostly subdued although traders were also keeping a wary eye on Huarong.

Offshore bonds issued by subsidiaries of Huarong fell on Tuesday, after Fitch Ratings downgraded the parent company, even as Huarong companies met deadlines on debt repayment. "While the PBoC is expected to lend support to the state-owned bad-assets company, the issue will probably still cast a shadow over China's economic recovery and financial market stability," said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.

Broader market concerns were still evident on Tuesday as the cost to insure against defaults on China's dollar debt ticked higher.

"The bottom line is that policymakers appear to be cleaning house at the same time it is encouraging deleveraging and rebalancing," Brown Brothers Harriman said in a note.

"That is a lot of balls to juggle and the law of unintended consequences suggests investors should remain on alert."

By midday, the global dollar index rose to 90.967 from the previous close of 90.885, while the offshore yuan was trading at 6.4818 per dollar.