China's yuan firmed against the US dollar on Tuesday after the central bank set the midpoint at its firmest in 11 months, as the Chinese currency continued to benefit from a soft dollar. Prior to market opening, the People's Bank of China set the yuan's midpoint at 6.6597 per dollar, the strongest level since September 22, 2016.
Tuesday's official guidance was 112 pips or 0.17 percent firmer than the previous fix at 6.6709 per dollar. In the spot market, the yuan opened at 6.6620 per dollar and was changing hands at 6.6570 at midday, 60 pips firmer than the previous late session close and 0.04 percent stronger than the midpoint.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.78, firmer than the previous day's 94.7. The global dollar index rose to 93.177 from the previous close of 93.095, but has retreated from a three-week high set last Wednesday.
The offshore yuan was trading 0.11 percent weaker than the onshore spot at 6.6645 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 6.795, 1.99 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate. "The yuan was involuntarily following the dollar's movements, and such a trend is likely to continue in the near term," said a trader at a foreign bank in Shanghai. Traders said some market participants sold long dollar positions to reduce losses while some companies' seasonal dollar purchases capped the yuan's gains in morning trade.
Companies with financing and business needs for the greenback usually shore up their dollar positions when the month-end approaches. The foreign exchange market also awaits the annual central banking conference in Jackson Hole, Wyoming later this week where central bankers may signal their next policy actions.