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China’s Yuan Retreats Against Dollar Ahead of Long Holiday and Fed Meeting
(CTN News) – China’s yuan fell against the dollar on Tuesday, after reaching a one-month high the day before, as traders were hesitant to take large wagers ahead of the lengthy Labor Day holiday and the Federal Reserve’s monetary policy meeting this week.
China’s financial markets will be closed for extended holidays beginning Wednesday, with trade scheduled to resume next Monday.
The yuan has lost 2% against the dollar this year and is on track for its fourth consecutive monthly loss, driven down by its relatively low rates compared to other currencies.
Prior to market opening, the People’s Bank of China (PBOC) established the midpoint rate, around which the yuan can trade in a 2% band, at 7.1063 per dollar, three pips higher than the previous fix of 7.1066.
The central bank resumed its months-long pattern of setting interest rates higher than market expectations, which traders saw as an attempt to keep the currency stable.
Tuesday’s midpoint was 1,396 pips higher than the Reuters forecast of 7.2459.
According to Maybank experts, the official fix demonstrates the central bank’s determination to maintain control over the volatile yuan.
“So far, the PBOC has kept the reference rate steady at 7.10 percent,” they noted in a message to clients.
“Raising the USD/CNY fix could potentially drive the USD/CNH higher and what PBOC likely desires is a controlled pace of yuan depreciation in the face of a strong USD environment.”
In the spot market, the onshore yuan began at 7.2383 per dollar and was trading at 7.2427 at midday, 177 pips lower than the previous late session finish.
“We see the possibility for further near-term weakness towards the key 7.30 level, as the authorities have been gradually allowing the onshore spot to adjust,” said Khoon Goh, head of Asia research at ANZ.
Goh cut his year-end yuan projection to 7.2 per dollar from 7.0 before.
The onshore spot yuan reached a high of 7.22 a day ago, the highest level since March 29. Currency dealers ascribed the yuan’s rapid surge to Japanese officials’ suspected intervention to strengthen the yen, which rebounded dramatically on Monday from 34-year low levels.
Markets are also keeping a tight eye on the impending Fed policy meeting and China’s month-end Politburo meeting for further signals on the currency’s movements, according to dealers.
The Fed is likely to keep interest rates at 5.25%-5.5%, but markets will be watching for policymakers’ comments that could offer light on the world’s largest economy’s monetary policy trajectory.
Separately, the market remained largely unchanged following the release of China’s official factory survey for April, which showed that manufacturing activity expanded more slowly.
By lunchtime, the global dollar index had risen to 105.847 from the previous finish of 105.579, while the offshore yuan was trading at 7.2528 per dollar.
