Yuan ends at 1-week high on upbeat loan data, PBOC guidance

CHINA’S yuan rose for a second day on Friday (Sep 9) to end domestic trade at a 1-week high against a broadly weaker US dollar, backing away from the key 7 per US dollar mark while the central bank sought to stabilise rates with firmer-than-expected official guidance.

Onshore yuan finished the domestic trading session at 6.9192 per US dollar, 371 pips firmer than the previous late close of 6.9563.

Some traders said better-than-expected August loan growth data lent support to sentiment towards the yuan.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.9098 per US dollar, 50 pips firmer than the previous fix of 6.9148.

Friday’s midpoint exceeded market expectations for the 13th session in a row, traders and analysts said, which markets widely interpreted as part of official attempts to slow the yuan’s depreciation.

The day’s midpoint was also 108 pips firmer than the Reuters estimate of 6.9206.

Despite the rebound on Thursday and Friday, the onshore yuan rate will still have lost 0.26 per cent against the US dollar for the week if it finishes the late session at the domestic closing level, for a fourth straight weekly loss.

“Growth, policy divergence between the US and China could continue to support the USD/CNH in the next few months, even if some pullback is seen intermittently,” Maybank analysts said in a note.

The Federal Reserve’s hawkish tightening stance has boosted the US dollar this year, pressuring most emerging market currencies, while China’s surprise decision to lower key interest rates in August, as it grapples with persistent economic weakness, has accelerated the yuan’s slide.

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Market watchers widely believe that China’s mild inflationary pressures, which are very low by global standards, will allow authorities some leeway to roll out more easing measures to support the economy.

But authorities may hold off from easing in the near term as worries mount over the weakening currency.

“The rate cuts we saw in August suggest that the PBOC has its eye on the struggling economy. But we have seen signs of increased concern by the bank regarding the currency’s decline as well,” said Sheana Yue, China economist at Capital Economics.

“For now at least, we think the bank’s priorities lie in keeping the currency stable to stem further capital outflows.”

China debt markets lost US$7.7 billion in August for a seventh straight month of portfolio outflows, data from the Institute of International Finance (IIF) showed on Thursday. Chinese stocks attracted marginal gains of US$1 billion, marking the smallest year-to-date inflows in seven years.

Yue expects the PBOC to keep the interest rate for the medium-term lending facility (MLF) unchanged during next week’s rollover, but sees chances of a further rate cut later in the year.

A 600 billion yuan (S$121 billion) batch of 1-year MLFs is due next Thursday.

Xing Zhaopeng, senior China strategist at ANZ, said the central bank’s decision to lower the amount of foreign exchange that financial institutions must hold as reserves also signalled its reticence about easing in the immediate future.

“Given this, the PBOC will likely postpone the next easing move,” Xing said, expecting a cut to banks’ yuan reserve requirement ratios no sooner than October. REUTERS