SHANGHAI: China's yuan briefly weakened to a 10-day low against the dollar on Monday, with safe-haven demand underpinning the US currency as the spread of the Delta variant of the coronavirus stoked worries over the pace of the global economic recovery.
Many market participants also refrained from making huge bets on the yuan ahead of China's monthly benchmark loan prime rate (LPR) fixing due on Tuesday amid divided views on the rate outlook, traders said.
The People's Bank of China (PBOC) surprised markets last week when it delivered a cut in banks' reserve requirement ratio (RRR). But it only partially rolled over a maturing liquidity tool and kept the one-year rate unchanged.
Prior to market opening, the PBOC set the midpoint rate at 6.4700 per dollar, 5 pips firmer than the previous fix of 6.4705.
China's yuan weakens as cabinet floats RRR cuts
In the spot market, onshore yuan opened at 6.4760 per dollar and eased to a low of 6.4839, the softest level since July 9.
By midday, it was changing hands at 6.4791, 5 pips weaker than the previous late session close.
Several currency traders said they were largely sitting back to await the next catalyst, with the focus turning to the July LPR fixing.
"Whether LPR will get lower on 20th will be watched by the market. But given the MLF operation last week at an unchanged rate of 2.95% for 1-year, chances of lower LPR setting appear slim," Citi analysts said in a note.
Meanwhile, cash conditions in the interbank markets after the RRR cut failed to loosen as much as markets had expected, with the benchmark overnight repo rate continuing to trade above 2%, a level that many investors use to gauge liquidity conditions.
"In general, the monetary policy was not as loose as market had expected last week," said Li Liuyang, chief FX analyst at China Merchants Bank.
"Easing expectations still require China's economic data to confirm the slowdown in the recovery before they gradually weigh on the exchange rate."
By midday, the global dollar index stood at 92.725, while the offshore yuan was trading at 6.4828 per dollar.