HONG KONG: China’s yuan eased from a two-week high on Wednesday against the dollar as investors were cautious ahead of the upcoming Federal Reserve policy meeting for clues on the outlook for US interest rates beyond this week.
“The Fed is closer to the end of its tightening cycle and that could mean the pressure of negative (return) on the yuan compared to the dollar may start to ease,” said Maybank analysts in a research note.
The widening US-China yield gap and China’s sputtering post-COVID economic recovery have been weighing on the yuan this year.
The Fed is widely expected to raise its benchmark overnight interest rate by 25 basis points to the 5.25%-5.50% range at its meeting later during the global day.
The yuan pulled back from a strong rally seen on Tuesday, when it rose 0.7% in offshore trade to a two-week high on the back of broad economic support measures announced at the Politburo meeting.
Analysts expect further upside for the yuan due to improving sentiment thanks to pledges by the government to resolve the local government debt issue, and indications of further support to the troubled property sector.
The offshore yuan was trading 0.02% weaker than the onshore spot at 7.1568 per dollar. Maybank expects the offshore yuan may see more upside to 7.1160 per dollar level.
China’s yuan eases ahead of Politburo and global central bank meetings
The People’s Bank of China set the midpoint rate at 7.1295 per US dollar prior to market open, firmer than the previous fix 7.1406 and 46 pips stronger than consensus estimates.
The central bank has been setting a stronger-than-expected daily fix since late June, which markets see as a signal of authorities’ discomfort over the yuan’s weakness.
The spot yuan opened at 7.1480 per dollar and was changing hands at 7.1556 at midday, 169 pips weaker than the previous late session close and 0.37% weaker than the midpoint.
The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day.
The global dollar index rose to 101.433 from the previous close of 101.349.
Besides the Fed meeting, investors will also be closely watching the European Central Bank policy review on Thursday with markets expecting a quarter point hike, while the Bank of Japan is set to maintain its ultra-easy monetary settings on Friday.
“The market would be looking for signals that the Fed and European Central Bank have gotten closer to calling an end to their respective hike cycles,” said DBS analysts in a client note on Wednesday.
The offshore yuan was trading 0.02% weaker than the onshore spot at 7.1568 per dollar.
The one-year forward value for the offshore yuan traded at 6.9378 per dollar, indicating a roughly 3.16% appreciation within 12 months.