China's yuan inched up against the US dollar on Friday, poised for a winning week as the US currency comes under pressure from concerns about the progress of US tax reforms. The dollar was headed for a weekly loss of 0.3 percent after the US Federal Reserve raised interest rates, as expected, but also expressed concern about low inflation. Meanwhile, wrangling in Congress over a bill to change the US tax code also dented confidence.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.6113 per dollar, 80 pips or 0.12 percent weaker than the previous fix 6.6033. In the spot market, the onshore yuan opened at 6.6084 per dollar and was changing hands at 6.6076 at midday, 19 pips stronger than the previous late session close and 0.06 percent firmer than the midpoint.
If the yuan ends the late night session at the midday level, it would have strengthened 0.25 percent against the dollar. It eased around 0.05 percent last week. Domestic traders said seasonal corporate demand for the greenback at mid-month continued to cap gains in the Chinese currency.
"A scenario where the dollar continues to find itself under selling pressure amid low inflation concerns in the US, could drag the USD/CNY towards 6.6000," Lukman Otunuga, Research Analyst at FXTM said. Morgan Stanley analysts said in a research note on Friday the yuan barely reacted to the PBOC's decision to increase its short- and medium- term market rates following the Fed's rate hike.
"Going forward, our economists see the PBOC's 7-day repo rate moving higher by 70 basis points over next year as CPI increases. However, we expect RMB to remain largely stable on the trade-weighted index (TWI) through 2018," it said. Some analysts said the PBOC can be expected to safeguard the yuan amid rising US rates by continuing to tighten.
"The likelihood of PBOC hiking interbank rates after the Fed is almost certain. It also signals that de-leveraging in China will persist. The capability of small/medium banks to roll out ambiguous wealth management products will be weakened further due to rising funding costs," DBS economist Chris Leung said in a note. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.31, firmer than the previous day's 95.24.
The global dollar index rose to 93.583 from the previous close of 93.489. The offshore yuan was trading at the same level as the onshore spot at 6.6076 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 6.7645, 2.26 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.