China's yuan steadied in narrow trade against the US dollar on Monday, with the market switching its focus to the US Federal Reserve's policy meeting this week. With the Fed widely anticipated to raise interest rates, investors will be looking for fresh clues on the pace of further tightening in the months to come and next year, and any details on its plans to trim its balance sheet.
The People's Bank of China set the midpoint rate at 6.7948 per dollar prior to market open, firmer than the previous fix 6.7971. Monday's fixing was set firmer than forecasts, traders said, adding the market did not think the so-called "counter-cyclical factor" was implemented on Monday. The China Foreign Exchange Trade System (CFETS) trading platform, overseen by the People's Bank of China (PBOC), said in late May that a "counter-cyclical factor" would be introduced into the way it calculates the yuan's reference rate each day allowing it to better reflect supply and demand.
In the spot market, the yuan opened at 6.7983 per dollar and was changing hands at 6.7971 at midday, only 1 pip weaker than the previous late session close and 0.03 percent softer than the midpoint. The yuan strengthened 0.17 percent to the greenback last week, but its value based on a trade-weighted index against a basket of currencies fell slightly. The index edged down to 93.09 last Friday, 0.08 percent lower than the week earlier, according to official data from the China Foreign Exchange Trade System (CFETS). The global dollar index fell to 97.191 from the previous close of 97.274.
The offshore yuan was trading 0.12 percent firmer than the onshore spot at 6.789 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.9665, 2.46 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
"Trading was not active. The yuan spot rate does not seem to have much room to strengthen further, while the market does not have strong willingness to test lows," said a Shanghai-based trader at a Chinese bank, adding that attention was squarely on the Fed's interest rate decision due on Wednesday.