Yuan firms as China refrains from more easing, for now

SHANGHAI: China's yuan hit a two-week high against the dollar on Tuesday after the central bank refrained from a further rate cut, though analysts believe more easing is likely still on the cards to spur weak investment and demand.

The People's Bank of China injected more funds than expected into the financial system through medium-term loans early in the day, but kept the interest rate unchanged at 2.85% after a flurry of cuts to key rates last month.

The onshore yuan opened at 6.3535 per dollar and was changing hands at 6.3537 at midday, 38 pips stronger than the previous late session close, after the PBOC set a firmer midpoint rate.

China's yuan softer as Ukraine, inflation worries lift dollar

The yuan also got support from data showing continued foreign money flows into China's bond market despite the growing divergence between the PBOC's easing and policy tightening in many Western economies.

The PBOC said late on Monday that six new foreign institutions participated in China's interbank bond market in January, bringing the total to 1,021.

Separate data released over the weekend showed that holdings of Chinese government bonds by offshore investors rose last month despite a steep drop in yield premiums over US government debt.

However, some analysts see growing depreciation pressure for the yuan, as more easing is likely on the horizon.

"We think it's only a matter of time before the PBOC resumes its rate reductions," Julian Evans-Pritchard, senior China economist at Capital Economics wrote on Tuesday.

"The data we have so far suggest that economic momentum remained weak at the start of this year."

Traders say the yuan is also being supported by still-brisk export-related dollar settlement, but caution that rapidly worsening geo-political tensions could boost safe-haven demand for the greenback.

Ukraine President Volodymyr Zelenskiy on Monday called on the country's people to fly flags and sing the national anthem in unison on Feb. 16, a date that some Western media say Russian forces could invade.