China’s yuan edged up against the dollar on Thursday after the central bank set guidance at a fresh seven-month high following the US Federal Reserve’s widely-anticipated rate hike. The Fed raised interest rates a quarter percentage point to a target range of 1.00 percent to 1.25 percent as expected on Wednesday, and gave its first clear outline on its plan to reduce its $4.2-trillion bond portfolio. However, China’s central bank left interest rates for open market operations unchanged on Thursday, unlike in March, when it raised rates within hours of the Fed’s move.
The yuan is on a steadier footing amid tighter liquidity conditions now, and one foreign exchange trader believed that China refrained from raising rates because it did not want to establish a pattern of following the Fed. Before the market open, the People’s Bank of China set the midpoint rate at 6.7852 per dollar, the strongest since Nov. 9. Thursday’s fix was 87 pips, or 0.13 percent firmer than the previous fix of 6.7939. The rise in the yuan midpoint appeared to track the global dollar index, which fell after the Fed’s decision.
In the spot market, the yuan opened at 6.7882 per dollar and was changing hands at 6.7939 at midday, only 4 pips stronger than the previous late session close but 0.13 percent weaker than the midpoint. “The domestic market was stable. But this was well within our expectations as the rate hike had already been priced in,” said a trader at a foreign bank in Shanghai. “Increases in the interest rates were fine. But shrinking balance sheet would boost the dollar in the long run,” the trader said, noting the Fed’s plan to reduce its portfolio would “inevitably” pile pressure on the Chinese yuan.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.24, weaker than the previous day’s 94.26. The global dollar index fell to 96.906 from the previous close of 96.939. The offshore yuan was trading 0.15 percent firmer than the onshore spot at 6.7835 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 6.958, 2.48 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.