SHANGHAI: China’s yuan held steady against the US dollar on Wednesday, as traders returned to work after the Mid-Autumn Festival break and ahead of the Federal Reserve’s key rate decision.
The Federal Open Market Committee (FOMC) meeting, which concludes later on Wednesday, is expected to kick off a US easing cycle that could spark volatility in currency pairs, including dollar-yuan.
The chances of a super-sized cut of 50 basis points (bps) retreated to 65% in the morning session in Asia, according to LSEG data, after US retail sales unexpectedly rose in August.
A broader decline in the dollar in anticipation of US rate cuts in coming months has buffeted the yuan over the past few weeks. The currency has recovered its earlier losses and is 0.1% firmer this year.
“Should the Fed disappoint markets and signal a gradual, calibrated pace of rate cuts, there may well be a knee-jerk rebound in the USD as short-end rates reprice higher,” said Chang Wei Liang, FX and credit strategist at DBS.
“There is likely to be significant intraday market volatility tonight when the FOMC decision is announced along with the latest dot-plots,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
China’s yuan slips on economic weakness despite tight offshore funding
Trading in China’s onshore currency resumed on Wednesday after the domestic market was closed on Monday and Tuesday.
Prior to the market’s opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.0870 per dollar, its strongest since Jan. 2 and 42 pips weaker than a Reuters’ estimate.
The spot yuan opened at 7.0968 per dollar and was last trading 14 pips lower than the previous late session close at 7.0972 as of 0250 GMT and 0.14% weaker than the midpoint.
The offshore yuan traded at 7.0992 yuan per dollar, up about 0.17% in Asian trade.
The dollar’s index against six major currencies was 0.079% lower at 100.83.
China’s central bank said it injected 568.2 billion yuan ($80.11 billion) through seven-day reverse repos in open market operations on Wednesday and that it would conduct the medium-term lending facility (MLF) loans rollover on Sept. 25.
Investors expect China to keep its policy accommodative, with the potential to ease further at its monthly loan prime rate (LPR) fixing on Friday and possible cuts to its reserve requirement ratio (RRR).
New bank lending in China jumped less than expected in August after hitting a 15-year low in July, as the central bank pledged to roll out more supportive measures to bolster a fragile economic recovery.
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