China’s yuan edged up against the dollar on Wednesday, with the market unfazed by evidence of a still-solid economy and divided over the impact of an anticipated rise in US interest rates. A small majority of traders in a Reuters poll say a US interest rate hike could prompt the People’s Bank of China (PBOC) to raise short-term money market rates, as it did in March when the Fed raised rates, to stabilise money flows.
A higher federal funds rate will narrow the interest rate gap between China and United States, which could pressure the yuan. But others said the authorities had moved to stabilise the yuan and the Fed decision was almost a foregone conclusion. “The market had already priced in the June rate hike,” said a trader at a foreign bank in Shanghai. He added, however, that attention would be on what the Fed signals on the path of further interest rate adjustments.
The PBOC set the midpoint rate at 6.7939 per dollar prior to market open, firmer than the previous fix 6.7954. In the spot market, the yuan opened at 6.7979 per dollar and was changing hands at 6.7964 at midday, 25 pips firmer than the previous late session close but 0.04 percent weaker than the midpoint.
The yuan spot rate found comfort marginally stronger than the 6.8 per dollar level, Lukman Otunuga, Research Analyst at FXTM said. “The USDCNY remains at risk of trading lower if the Federal Reserve adopts a cautious tone in Wednesday’s FOMC meeting,” he added. The Fed will announce its monetary policy decision at 1800 GMT on Wednesday at the end of a two-day policy meeting, followed by a press conference by Fed Chair Janet Yellen.
Domestic traders said tiny price swings in the market continued to allow some institutions to make multiple intraday trades for quick profit as seen on Tuesday. The daily trading volume stood at $19.506 billion by 0355 GMT, compared with full-day volume of $32.811 billion a day earlier, which was more than 35 percent higher than Monday’s total volume at $24.147 billion.
The state-run Financial News reiterated on Wednesday that the Chinese authorities will stick with a “prudent and neutral” monetary policy. On Wednesday, data showed China’s factory output and retail sales grew at a steady pace in May but investment slowed, reinforcing views that higher lending costs and a cooling property market will likely take some steam out of economic growth.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.31, weaker than the previous day’s 94.32. The global dollar index fell to 96.967 from the previous close of 96.975.
The offshore yuan was trading 0.10 percent firmer than the onshore spot at 6.7895 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 6.9725, 2.56 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.