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[SHANGHAI] China's yuan firmed against the US dollar on Wednesday after the central bank set a stronger midpoint, but trading was subdued as markets awaited policy clues from the Federal Reserve which could heighten exchange rate volatility.
The Fed is expected to hold interest rates steady at a review ending later in the global day as it awaits more economic data, but it may hint it is on track for an increase in June.
The last time the Fed hiked rates in mid-March, China's central bank followed hours later with increases in short-term rates to discourage capital outflows and help keep the yuan steady.
The People's Bank of China set the midpoint rate at 6.8892 per US dollar prior to the market open on Wednesday, firmer than the previous fix 6.8956.
In the spot market, the yuan opened at 6.8927 per US dollar and was changing hands at 6.8929 at midday, 36 pips stronger than the previous late session close but 0.05 per cent weaker than the midpoint.
Traders said the yuan remained confined to a narrow range.
"The market was largely balanced, with slightly stronger corporate dollar purchases," said a trader at a foreign bank in Shanghai.
Apart from the Fed, traders were also looking to other potential external risks for global exchange rates, including Friday's US April non-farm payroll report and the run-off second round vote in the French presidential election on May 7.
Market watchers believes China's policymakers are keen to see the yuan remain relatively stable in the near term as regulators move to reduce risk and leverage in financial markets.
Worries about the potential impact of tighter regulatory measures on the banking sector and the economy have pulled China's benchmark share indexes well off their early April highs.
"Under such a circumstance, the authorities would be more willing to see a more stabilised forex market," said the first trader.
OCBC analyst Emmanuel Ng echoed that view in a research note saying: "Stability continues to remain the primary consideration at this juncture with the realized volatility of the mid-points having collapsed since April."
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.84, weaker than the previous day's 93.86.
The global US dollar index fell to 98.907 from the previous close of 98.976.
The offshore yuan was trading 0.06 per cent away from the onshore spot at 6.8891 per US 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 7.082, -2.72 per cent away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.