SHANGHAI: China's yuan rebounded from a 2-1/2-month low against the dollar on Monday as the market awaited second-quarter growth data for more clues on policy direction, after the central bank cut reserve requirements to prop up the economy.
The yuan had softened to its weakest level since late April on Friday after the People's Bank of China (PBOC) cut the amount of cash that banks must hold as reserves, releasing around 1 trillion yuan ($6.48 trillion) in long-term liquidity to underpin a post-COVID economic recovery that is starting to lose momentum.
While the move was flagged a few days earlier, the size of the cut was larger than expected, raising some concerns ahead of the release of June activity data and Q2 gross domestic product (GDP) figures on Thursday. However, most analysts did not think the cut in itself signalled a shift to an easier policy stance.
"Last week's cut in the RRR suggests the economy is slowing more than desired and so there are downside risks to this week's real sector data," Win Thin, global head of currency strategy at Brown Brothers Harriman, said in a note.
Yuan bounces off 2-1/2-month low, still set for 6th straight weekly loss
"We also suspect the PBOC will tolerate a weaker yuan, which would be a natural by-product of its easing stance."
Prior to the market opening, the PBOC set the midpoint rate at a more than two-week low of 6.4785 per dollar, 30 pips weaker than the previous fix of 6.4755.
Traders and analysts said Monday's midpoint fixing came in much weaker than their forecasts, and it was 46 pips weaker than Reuters' estimate of 6.4739 per dollar.
However, the spot yuan didn't follow the weakening trend. The onshore yuan opened at 6.4760 per dollar and was changing hands at 6.4743 at midday, 48 pips stronger than the previous late session close.
Ken Cheung, chief Asian FX strategist at Mizuho Bank, said instead of gauging impact on the market from higher liquidity against the backdrop of the RRR cut, markets should pay more attention to this week's data as evidence for the health of the broader economy.
"If the upcoming China hard data for June and Q2 GDP justified PBOC's concern, a re-pricing of China growth slowing towards its annual target at around 6% will likely push the RMB to above the 6.5 handle," Cheung said.
"Such case could open the door for PBOC's further easing and pose downside pressure on the RMB."
Though China's decision to pump more liquidity into the financial system has dragged bond yields lower, many traders said its interest rate advantage over most major economies persisted and should continue to attract foreign capital inflows, supporting the yuan.
The yield gap between China's 10-year government bonds and their US counterpart stood at 163 basis points on Monday morning, the narrowest level since July 1, according to Refinitiv data.
China's primary interbank money rates fell while treasury futures rose on Monday morning, following the RRR cut. The benchmark 10-year government bond futures for September delivery gained 0.27% by midday.
The global dollar index rose to 92.193 at midday from the previous close of 92.147, while the offshore yuan was trading at 6.478 per dollar.