China’s yuan firmed slightly against the U.S. dollar on Tuesday, ahead of possibly tighter monetary policy at home if U.S. interest rates rise this week. The market has turned its focus to the Federal Reserve’s two-day policy meeting that starts later on Tuesday, speculating that a hike in rates there will have a spillover effect on domestic money rates. “The market believes that China is highly likely to follow the Fed increasing the market rates this time, like what happened in March,” said a foreign exchange trader at a Chinese bank in Shanghai. He said that if the Fed stands pat on rates, however, there might not be immediate impact on the yuan from a softer dollar, as the market had already priced in a June rate hike in the United States to support the greenback.
He said that if the Fed stands pat on rates, however, there might not be immediate impact on the yuan from a softer dollar, as the market had already priced in a June rate hike in the United States to support the greenback.
The People’s Bank of China set the midpoint rate at 6.7954 per dollar prior to market open, weaker than the previous fix 6.7948. In the spot market, the yuan opened at 6.7984 per dollar and was changing hands at 6.7970 at midday, 18 pips firmer than the previous late session close but 0.02 percent softer than the midpoint.
Traders said spot yuan traded in tight ranges in the morning, but trading volumes climbed suggesting that some institutions were taking advantage of tiny price swings to make intraday trades for quick profit. The daily trading volume totalled $18.122 billion by 0350 GMT, compared with full-day volume of $24.147 billion on Monday.
Market participants expect such sideways trade to persist until the Fed announces its interest rate decision on Wednesday, or during early Asian trade on Thursday. With the Fed widely anticipated to raise interest rates, investors will be looking for fresh clues on the pace of further tightening in the months to come and next year, and any details on its plans to trim its balance sheet.
A Reuters poll found that a small majority of traders in China’s financial markets think the PBOC will likely raise short-term interest rates this week if the Fed hikes its key policy rate. HSBC said in a report the recent policy-induced decline in USD-RMB suggest the Chinese authorities have a strong desire to quash one-way RMB depreciation expectations. It lowered its USD-RMB forecast to 6.90 for year-end 2017 from 7.10 previously.
Economic Daily, a newspaper managed by the state cabinet, said on Tuesday the introduction of a “counter-cyclical factor” into calculating the yuan’s official midpoint was to improve the market-based yuan exchange rate formation mechanism, rather than intervention. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.39, firmer than the previous day’s 94.35.
The global dollar index rose to 97.247 from the previous close of 97.138. The offshore yuan was trading 0.11 percent firmer than the onshore spot at 6.7893 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 6.9715, 2.53 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.