China's yuan inched up against the US dollar by midday on Monday, underpinned by corporate dollar sales, while its value on a trade-weighted basis has risen to its best level since July 2016. The dollar was steady in morning trade, holding near a three-month high versus a basket of currencies, after the latest batch of US data backed expectations for the Federal Reserve to raise interest rates as soon as in December.
The yuan strengthened around 0.21 percent against the greenback last week, but on a trade-weighted basis it edged up about 0.34 percent against a basket of currencies of trading partners in the same period, according to official data from the China Foreign Exchange Trade System (CFETS). The index, published on a weekly basis, stood at 95.34 on Friday.
"We believe the CFETS RMB Index will likely remain elevated for now as the yuan will outperform other regional currencies prior to Trump's Asia travel," said Gao Qi, a currency strategist at Scotiabank in Singapore. He suggested the yuan was expected to be range bound but with a strengthening bias before US President Donald Trump's visit to China this week. Prior to market opening on Monday, the People's Bank of China lowered its midpoint rate to 6.6247 per dollar, the first weakening in five trading days, 175 pips or 0.26 percent softer than the previous fix of 6.6072 on Friday.
In the spot market, the onshore yuan opened at 6.6410 per dollar and was changing hands at 6.6350 at midday, 25 pips firmer than the previous late session close on Friday. Traders said the market was relatively balanced on Monday morning, with slightly heavier corporate dollar selling lifting the spot yuan rate higher.
Some analysts said the yuan would likely face some renewed downward pressure soon, weighed by strength in the US unit. CIB Research said in a note on Monday morning that the progress in US tax reforms and economic data would provide strong momentum for the greenback in the short term.
Separately, the Governor of the People's Bank of China Zhou Xiaochuan emphasised financial risk controls in an article published over the weekend. He said the market should play a "decisive role" in allocating financial resources, but also stressed the importance of stronger regulation and Communist Party leadership in guiding financial reform. The PBOC chief's strategy to prevent a future financial crisis was seen by market watchers as likely to keep the pressure on borrowers to reduce financial leverage.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.06, weaker than the previous day's 96.08. The global dollar index fell to 94.929 from the previous close of 94.941. The offshore yuan was trading 3 pips firmer than the onshore spot at 6.6347 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 6.7905, 2.44 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.