Strong demand lifts yuan, despite firmer dollar

SHANGHAI: The yuan inched higher against a firmer dollar on Wednesday, as persistently heavy demand for the Chinese currency dominated the market.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4831 per dollar, 11 pips firmer than the previous fix of 6.4842.

In the spot market, onshore yuan opened at 6.4830 per dollar and was changing hands at 6.4823 at midday, 44 pips firmer than the previous late session close.

China's yuan eases to 1-week low to reflect dollar rebound

Despite the marginal gains, traders said the Chinese yuan remained stuck in a very thin range as strength from heavy FX conversion into yuan from corporate clients and banks' proprietary accounts offset the impact from the rising dollar, which is strengthening as investors wager a high US inflation reading later in the session could pressure the Federal Reserve to start withdrawing policy support soon.

The dollar has already caught a boost from last week's strong US jobs data and from recent remarks by Fed officials hinting that asset purchase tapering is on the cards.

Yuan traders said it was likely to drift sideways before the annual Jackson Hole policy symposium later this month when the Fed may offer some comments on the timing of its tapering.

"If the Fed makes it clear about the timing of tapering, the yuan would weaken," said a trader at a Chinese bank.

Meanwhile, China's policy stance and possible reaction to the Fed decision was also in focus.

"The RMB's yield advantage is narrowing as the monetary policies in China and US diverge," analysts at HSBC said in a note.

"While the PBOC has started a measured easing process by cutting reserve requirement ratio (RRR) to replace maturing medium-term lending facility (MLFs), the Fed is getting closer to tapering QE as the labour market continues to recover."

They added that the yuan's outperformance would fade going into year-end in the wake of the policy divergence, slowing exports and its strength against its currency basket.

Some traders said they would gauge how the PBOC rolls over a batch of 700 billion yuan ($107.99 billion) worth of MLF maturing next Tuesday for clues on policy.

"A likely scenario is the MLF will be partially rolled over - to set a guidance on interest rate, with the remaining being potentially covered by liquidity via a reserve ratio cut," said Frances Cheung, rates strategist at OCBC Bank.

By midday, the global dollar index rose to 93.093 from the previous close of 93.073, while the offshore yuan was trading at 6.485 per dollar.