Yuan breaches key threshold, edges up to month high

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SHANGHAI — China’s yuan strengthened

past a key threshold to the firmest in a month on Tuesday,

underpinned by broad dollar weakness following a dip in U.S.

bond yields.

Prior to market opening, the People’s Bank of China (PBOC)

set the midpoint rate at a near one-month high of

6.5103 per dollar, 130 pips or 0.2% firmer than the previous fix

of 6.5233.

In the spot market, onshore yuan opened at 6.5020

per dollar, rose past the psychologically important 6.5 per

dollar level to a high of 6.4918, the strongest since March 18.

By midday, it was changing hands at 6.4959, 151 pips firmer than

the previous late session close.

Its offshore counterpart also strengthened past the

key level to trade at 6.491 per dollar at midday.

Traders said the yuan’s strength was reflecting broad dollar

weakness, and was likely to consolidate around 6.5 per dollar.

“We expect USD/CNY to enter a period of consolidation

following the stabilization of U.S. Treasury bond yields and the

USD,” Becky Liu, head of China macro strategy at Standard

Chartered, said in a note.

Liu added the yuan’s fundamentals remained strong but its

advantage over other developed economy currencies had narrowed.

More channels for capital outflows and a pick-up in dividend

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payments could reduce inflows into China and limit upside

potential for the Chinese currency in the near term.

The bank revised down its yuan forecasts to 6.5/dollar at

the end of Q2, 6.6 at end of Q3 and 6.58 at the year-end,

compared with 6.3, 6.4, 6.45, respectively, in previous

estimates.

Investors continue to gauge U.S.-China policy divergence,

pace of domestic vaccine rollouts, global economic trends and

the yield gap between China and other major countries, for clues

on the yuan’s outlook.

On Tuesday, the market took in stride no change to the

benchmark lending rate for corporate and household loans. China

kept the loan prime rate steady for the 12th straight month at

its April fixing, matching market expectations.

“With the economy doing well, policymakers are now focused

on tackling financial risks. But political constraints mean that

these efforts are unlikely to include policy rate hikes,” said

Julian Evans-Pritchard, senior China economist at Capital

Economics, who does not expect any change to policy rates in the

coming months.

As of midday, the global dollar index fell to 90.904

from the previous close of 91.049.

The yuan market at 0400 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.5103 6.5233 0.20%

Spot yuan 6.4959 6.511 0.23%

Divergence from -0.22%

midpoint*

Spot change YTD 0.50%

Spot change since 2005 27.41%

revaluation

Key indexes:

Item Current Previous Change

Thomson 96.51 96.53 0.0

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Reuters/HKEX

CNH index

Dollar index 90.904 91.049 -0.2

*Divergence of the dollar/yuan exchange rate. Negative number

indicates that spot yuan is trading stronger than the midpoint.

The People’s Bank of China (PBOC) allows the exchange rate to

rise or fall 2% from official midpoint rate it sets each

morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.491 0.08%

*

Offshore 6.6705 -2.40%

non-deliverable

forwards

**

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint,

since non-deliverable forwards are settled against the midpoint.

.

(Reporting by Winni Zhou and Andrew Galbraith; Editing by

Jacqueline Wong)