China’s yuan down on accommodative policy outlook, resilient dollar

SHANGHAI, March 26 (Reuters) –China’s yuan eased against the dollar on Tuesday, after a sharp bounce the previous day, pressured by underlying expectations that easier monetary policy at home and broad greenback strength will lead to more weakness in the local currency.

The yuan slumped to a four-month low on Friday, prompting a reassessment of its medium-term trajectory with many traders betting on more downside potential.

“I anticipate that USD/CNY could drift back towards the low 7.30s gradually over time,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

The PBOC needs to accommodate renewed dollar strength, but it will also continue to lean against volatility and ensure that FX moves are orderly, Tan said.

The 10-year US-China treasury yield gap remained elevated at 191 basis points and expectations for rate cuts in China to support a fragile economic recovery are nudging yields near record-low levels.

Prior to the market’s opening, the People’s Bank of China (PBOC) set the midpoint rate CNY=PBOCaround which the yuan is allowed to trade in a 2% band, at 7.0943 per US dollar prior to market open, 53 pips firmer than the previous fix 7.0996.

The fixing came in 1094 pips stronger than a Reuters’ estimate, in line with PBOC’s continued support for the yuan.

The spot yuan CNY=CFXS opened at 7.2050 per dollar and was changing hands at 7.2177 at midday, 57 pips weaker than the previous late session close and 1.74% away from the midpoint.

The global dollar index .DXY fell to 104.174 from the previous close of 104.473.

The offshore yuan CNH=D3 was trading 293 pips weaker than the onshore spot at 7,247 per dollar.

The gap between China’s onshore and offshore yuan remained wide, suggesting the onshore yuan is still under depreciation pressure, said traders at state-owned banks.

Subsequent stabilization of the yuan will require positive reinforcements such as a weakening dollar or a significant improvement in China’s economic fundamentals, the traders said.

The yuan market at 0316 GMT:

ONSHORE SPOT:

Item	Current	Previous	Change
PBOC midpoint CNY=SAEC	7.0943	7.0996	0.07%
Spot yuan CNY=CFXS	7.2177	7,212	-0.08%
Divergence from midpoint*	1.74%
Spot change YTD			-1.66%
Spot change since 2005 revaluation			14.67%

Key indexes:

Item	Current	Previous	Change
Thomson Reuters/HKEX CNH index			0.0
Dollar index	104,174	104,473	-0.3

*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