SHANGHAI: The Chinese yuan was steady on Thursday as the dollar hovered near eight-month lows, with minutes from the Federal Reserve’s latest meeting strengthening bets the US central bank will cut rates next month.
The yuan was around 7.1322 per dollar at noon, barely changed from the previous day’s close, after the People’s Bank of China set its guidance rate at a near two-month high.
After months pinned to the low end of its daily trading band as China’s economic outlook darkened, the yuan has rebounded to hit the middle of the range over the last few weeks, mostly because the dollar has weakened.
But further strength will likely be constrained by economic weakness, signs of heavy capital outflows, and the potential for escalation in China’s trade conflicts with the West that could eat into exports.
China faces growing capital outflow pressure, but so far, a “trade surplus has provided support to” the yuan,“ Cai Shaoli, analyst at Huatai Futures said in a note on Thursday.
Despite recent yuan strength, “there’s too much uncertainty in both domestic and international economic situations, so we need to closely monitor policy shifts,” Cai said, identifying geopolitical risks, Sino-US ties and cross-border capital flows as the main sources of uncertainty.
The Federal Reserve appears to be very much on track for an interest rate cut in September after a “vast majority” of officials said such an action was likely, according to the minutes of the US central bank’s July 30-31 meeting.
Traders are also holding their breath ahead of a Friday speech by Fed Chair Jerome Powell at Jackson Hole, Wyoming, where he is expected to make the case for interest rate cuts.
In China, bond futures rose across the board on Thursday, after China’s interbank watchdog was cited by state media as saying the central bank has not set a range for bond yields despite recent warnings against reckless buying.
Low-dated yields, which move inversely to prices, fell, potentially putting pressure on the yuan.
Trade tensions could also weigh on the yuan as China opened an anti-subsidy probe into dairy imports from the European Union on Wednesday, a day after Brussels published a revised tariff plan for China-made electric vehicles.
The US presidential election also casts a cloud over the outlook for Sino-US trade relations.
By 04:10 GMT, the yuan was 0.04% lower at 7.1328 to the dollar after trading in a range of 7.1307 to 7.1374.
The offshore yuan traded at 7.1305 yuan per dollar, up about 0.02% in Asian trade.