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China's yuan inches higher, GDP data caps gains

  • By midday, the global dollar index stood at 92.423, while the offshore yuan was trading at 6.4668 per dollar.
15 Jul, 2021
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SHANGHAI: China's yuan inched higher against the dollar on Thursday, to reflect some weakness in the greenback in global markets, but gains were capped by a slightly weaker-than-expected second quarter growth data.

China's economy grew less robustly than expected in the second quarter, as slowing manufacturing activity, higher raw material costs and new COVID-19 outbreaks weighed on the recovery momentum.

"China's Q2 GDP showed that the cyclical rebound from the pandemic has peaked. The future momentum will be more normalised and also return to more structural factors as well," said Gary Ng, economist for Asia-Pacific for Natixis in Hong Kong.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at a more than one-week high of 6.464 per dollar, 166 pips or 0.26% firmer than the previous fix of 6.4806.

Yuan near 1-week high as strong trade data ease economic slowdown worries

In the spot market, onshore yuan opened at 6.4620 per dollar and strengthened to a high of 6.4602 before changing hands at 6.4658 at midday, 32 pips firmer than the previous late session close.

Traders said the yuan benefited from a retreat in the dollar in morning trade after the US Federal Reserve chair Jerome Powell reassured that he was in no rush to tighten policy.

Some currency traders said markets were still awaiting more clues to justify whether the latest cut to Chinese banks' reserve requirement ratio (RRR) was fine-tuning monetary policy or kickstarting a more broad-based easing cycle to prop up the economy.

The PBOC partially rolled over maturing medium-term loans earlier on Thursday, while keeping the interest rates unchanged, the same day as a cut in the banks' RRR took effect.

"By now, the market is likely to interpret China's RRR cut as a hawkish cut," Wang Ju, senior FX strategist at HSBC in Hong Kong, said in a note.

"We think the direction of diverging monetary policy between China and the US is clear, which should lead to a rebound in USD/RMB (yuan) going into year-end," she added, expecting the yuan to weaken to 6.6 per dollar at the end of this year.

Despite the steady MLF rate on Thursday, China's surprise RRR cut decision has fuelled speculation about further monetary easing to underpin the economy. Some market watchers say a cut in the country's benchmark loan prime rate may be next, possibly as early as next week.

By midday, the global dollar index stood at 92.423, while the offshore yuan was trading at 6.4668 per dollar.

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