Yuan steady on central bank currency policy and ahead of Fed rates decision

PUBLISHED : Monday, 12 June, 2017, 2:10pm
UPDATED : Monday, 12 June, 2017, 2:10pm

The yuan was steady on Monday ahead of an interest rate decision by the US Fed and amid expectations that the People’s Bank of China will keep the currency stable for the remainder of the year.

On Monday, the central bank set the yuan’s daily reference rate little changed at 6.7948 per dollar after lowering the rate in the previous two days.

“The PBOC fixing appears to be normalising in the last week where it has stopped purposely strengthening the yuan,” Sean Yokota, a strategist at SEB, wrote in a research note, adding that offshore yuan liquidity has also fallen back to normal levels.

Onshore yuan was little changed at 6.7972 per dollar on Monday while the currency in Hong Kong’s offshore market dropped 0.06 per cent to 6.7878, falling for the fourth straight day in its longest losing streak since April 10.

The central bank last month tweaked its formula for calculating daily yuan reference rates. It was said to have also engineered a spike in offshore yuan rates to signal markets that it will not tolerate an excessively weak yuan in an effort to ward off capital outflows.

Reflecting normalised conditions from previous tight liquidity conditions, the overnight CNH Hibor rate, a gauge of yuan funding costs between banks in Hong Kong, was at 1.88 per cent on Monday compared to 1.81 per cent on Friday and 21.1 per cent in early-June.

Analysts expect China’s economy to face headwinds in the months ahead after last week’s release of lower-than-expected PPI inflation, which came in at 5.5 per cent in May compared with 6.4 per cent in April.

Meanwhile, the dollar index, a gauge of the greenback’s performance against a basket of other currencies, traded near a week high as worries over US political controversies eased and after a hung UK parliament boosted the dollar against sterling.

Markets have mostly priced in an interest rate increase that is expected at this Thursday’s US FOMC meeting although the focus is likely to turn to Fed chairman Yellen’s comments for an indication of the pace of further increases thereafter.