SHANGHAI: China’s yuan slightly weakened against the dollar on Tuesday, as sharply escalating COVID-19 cases and unexpectedly weak trade data offset optimism about an eventual economic reopening that had fuelled wild currency swings last week.

In the onshore market, the yuan was changing hands at 7.2381 per dollar at midday, 0.1% weaker than previous late session close, despite the People’s Bank of China setting the midpoint rate at a one-week high of 7.215 per dollar.

Meanwhile, the dollar index remained soft, trading at around 110, amid bets that possible Republican gains in the US midterm elections could lead to greater pushback on larger fiscal spending, potentially weighting on the greenback.

In China, COVID-19 cases sharply escalated in Guangzhou and other major Chinese cities, official data showed on Tuesday, with the global manufacturing hub fighting its worst flare-up ever.

“Signs of rising COVID cases in China” and potentially elevated US October inflation data on Thursday are headwinds to risk-on mood, Maybank analysts said in a note to clients.

But the market continues to seize on incremental COVID policy adjustments as evidence that China is preparing for an eventual economic reopening. Such bets triggered the biggest jump ever in offshore yuan last week.

“Just as markets could continue to speculate on the end of the Fed tightening cycle, investors could also be betting on what should be the inevitable end of China’s COVID-zero policy,” Maybank said.

“Such plays could continue to generate wild swings.”

Also curbing optimism toward the yuan, is trade data released on Monday that showed both China’s exports and imports unexpectedly contracted in October - the first simultaneous slump since May 2020.

In an article published in local media on Tuesday, Guan Tao, global chief economist at BOC International, and a former forex regulator, said that “the key to stabilizing exchange rates, is to improve economic prospects, and boost market confidence.”

China has experienced a fresh wave of strong capital outflows this year, and increased yuan flexibility helped cushion such impacts and safeguard China’s economic and financial stability, he said.