SHANGHAI: China's yuan inched higher against the US dollar on Tuesday, as investors digested the Chinese central bank's decision to cut the amount of cash that banks must set aside in reserve, while shining trade data lifted market sentiment.
The People's Bank of China (PBOC) said on Monday it would lower banks' reserve requirement ratio (RRR), its second such move this year, releasing 1.2 trillion yuan ($188.36 billion) in long-term liquidity to bolster slowing economic growth.
Both the onshore and offshore yuan eased following the announcement because increased liquidity usually drags currencies lower, but the yuan recovered on Tuesday on hope for more supportive measures to arrest economic slowdown, traders said.
"We reckon that the People's Bank of China had made a dovish shift to support the economy against the new downward pressures, and further policy easing may be forthcoming," said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank.
Cheung also said he expects monetary policy divergence between the US Federal Reserve and the PBOC to "eventually drive modest RMB (yuan) depreciation throughout next year".
Prior to market open, the PBOC set the midpoint rate for the yuan at 6.3738 per dollar, 36 pips weaker than the previous fix of 6.3702.
In the spot market, the onshore yuan opened at 6.3734 per dollar and was changing hands at 6.3712 at midday, 50 pips firmer than the previous late session close.
Some traders said the yuan and market sentiment improved in morning deals on better-than-expected November trade data, suggesting the recent rally in the currency has not yet hampered robust exports.
As domestic demand may still need time to recover, the trade surplus could stay elevated and support yuan outperformance, while the need to support small and mid-sized enterprises and prevent spillover from credit could increase the incentive to keep foreign exchange stable, Citi analysts said in a client note.
Separately, state media on Tuesday cited sources saying the PBOC will cut rates on its re-lending facility by 25 basis points to support the rural sector and small firms, effective Dec. 7.
Analysts and traders also said markets are awaiting the annual Central Economic Work Conference, likely to be held in coming days, which they said may reveal more policy guidance for the next year and bring volatility to financial markets.
By midday, the broad dollar index fell to 96.226 from the previous close of 96.29, while the offshore yuan was trading at 6.3724 per dollar.
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