HONG KONG: China’s yuan nudged higher against the US dollar after trading lower initially on Tuesday, with investors largely staying on the sidelines as banks kept their key lending rates unchanged, as expected.
China kept its loan prime rates (LPRs), the benchmark lending rates which is set on the 20th each month, unchanged for the fourth consecutive month on Tuesday.
The one-year loan prime rate (LPR) was kept at 3.65%, while the five-year LPR was unchanged at 4.30%.
The People’s Bank of China (PBOC) will probably guide LPRs lower in the coming months, especially the five-year LPR to support real estate and longer-term business loans, said Tommy Wu, a senior economist at Commerzbank.
“However, monetary stimulus will continue to be targeted to avoid re-leveraging. This means any future interest rate cuts will likely be modest,” Wu said in a research note on Tuesday.
The LPR is set by 18 designated commercial banks who submit proposed rates to the central bank.
The five-year is the benchmark that banks use to price home mortgages.
The spot yuan opened at 6.9815 per dollar and was changing hands at 6.9801 at midday, 17 pips stronger than the previous late session close and -0.09% away from the midpoint.
The PBOC set the midpoint rate at 6.9861 per US dollar prior to market open, weaker than the previous fix of 6.9746. The spot rate is currently allowed to trade in a range 2% above or below the official fixing on any given day.
China’s yuan eases on COVID worries amid sluggish trades
In the past few weeks, the yuan seems to have been driven by news related to China’s relaxation of COVID-19 controls, Goldman Sachs said in a report Tuesday. For the month up to Monday the yuan has risen 1.6% against the greenback.
“Further room for appreciation of the currency is likely to depend on the timing and magnitude of actual activity growth rebound,” it said. Goldman Sachs expects a small appreciation of the USDCNY over the 12-month horizon to 6.90.
The global dollar index fell to 104.225 from the previous close of 104.721.
The offshore yuan was trading 0.04% weaker than the onshore spot at 6.9826 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.818, 2.47% away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
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