SHANGHAI: China's yuan strengthened on Monday, as factory activity indicators showed a halt in recent declines and the inclusion of mainland bonds in a global market index drew foreign funds, another support for the local currency.
China's manufacturing sector unexpectedly returned to growth for the first time in four months in March, in a sign that government stimulus measures may be slowly gaining traction.
"Both better-than-expected economic data and bonds' inclusion underpinned the market this morning ... The inclusion should benefit the yuan in mid- to long- term," said a trader at a foreign bank in Shanghai, who expects the yuan to swing in a range of 6.68 to 6.72 in the near-term.
Prior to market opening on Monday, the People's Bank of China (PBOC) set the midpoint at 6.7193 per dollar, 142 pips or 0.21 percent firmer than the previous fix of 6.7335.
In the spot market, onshore spot opened at 6.7020 per dollar and was changing hands at 6.7066 at midday, 58 pips firmer than the previous late session close and 0.19 percent stronger than the midpoint.
From Monday, the Bloomberg Barclays Global Aggregate Index will gradually begin to include yuan-denominated onshore bonds while two other competing indices are expected to follow suit.
Traders and economists say the inclusion of Chinese bonds in the index has already driven foreign demand for the yuan and pushed swap points higher.
"The increasing capital inflows may also keep the points bid due to rising hedging demand. The points are expected to remain elevated in the near-term," said Tommy Xie, head of Greater China research at OCBC Bank in Singapore said in a note.
The one-year tenor of the dollar/yuan swap onshore traded at 140 points at midday, compared with Friday's close of 105 points. At the start of this year, the contract stood in negative territory and turned positive in mid-March.
Khoon Goh, head of Asia research at ANZ in Singapore, expects a total of $150 billion in foreign bond inflows over the 20-month phase-in period from asset managers tracking the Global Aggregate Index.
"Inclusion in other major bond indexes is only a matter of time. Alongside equity index re-weighting and further FX reserve allocation into RMB, the expected pick-up in foreign portfolio inflows will help offset the narrowing in China's current account surplus and support the yuan," Goh said in a note on Monday.
The global dollar index fell to 97.194 at midday, from the previous close of 97.284.
The offshore yuan was trading at 6.7115 per dollar as of midday.
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