China keeps yuan on even keel ahead of Fed, options in demand on G20 jitters
SHANGHAI, June 18 (Reuters) - China's yuan held largely steady against the dollar on Tuesday as the central bank once again set a firmer-than-expected official guidance rate, but most investors kept to the sidelines ahead of this week's U.S. Federal Reserve policy decision.
The Fed is not expected to cut rates on Wednesday but traders are looking for clues on whether it is preparing to lower them in coming months if the U.S. trade dispute with China drags on.
Amid worries of a longer and costlier trade war, China has managed to keep the yuan confined to a relatively steady and narrow range for weeks by persistently setting midpoints that were stronger than markets expected.
Prior to the market opening on Tuesday, the People's Bank of China set the midpoint rate CNY=PBOC at 6.8942 per dollar prior to market open, weaker than the previous fix of 6.8940.
Tuesday's guidance rate was again kept above the key 6.9 per dollar level and was 171 pips stronger than Reuters estimate of 6.9113 per dollar.
In the spot market, onshore yuan CNY=CFXS opened at 6.9255 per dollar and was changing hands at 6.9267 at midday, 9 pips softer the previous late session close.
Traders expect the yuan to remain in a wafer-thin range ahead of the G20 leaders' summit in Japan later this month, in line with China's past practices of keeping the currency steady during major domestic and global political events.
Investors are closely watching to see if U.S. President Donald Trump and his Chinese counterpart Xi Jinping will meet on the sidelines of the summit to discuss trade, after negotiations broke down last month and both sides raised tariffs on each others' goods.
"The onshore yuan is more reflecting the developments in the Sino-U.S. trade negotiations," said one trader at a Chinese bank.
Trump is preparing to extend tariffs on another $300 billion worth of Chinese imports and has said he would decide whether to trigger them after talks with Xi.
But expectations of any breakthroughs at the G20 are very low, and options trading is pointing to growing investor uncertainty over the trade outlook, and its impact on the yuan, after the G20.
Implied volatility in yuan options CNYVOL=, which gauges investors' expectations for swings in the dollar against the yuan, showed that volatility might pick up in the two weeks following the summit.
The two-month contract CNY2MO= rose to its highest level in a month in the morning session.
WAITING ON THE FED
Global markets are focusing on the Fed's two-day meeting for clues on whether it will start cutting rates soon, and by how much. The decision will be announced early in the morning on Thursday Asian time.
Expectations of a rate cut at the Fed's meeting have fallen to a probability of 20.8 percent, according to CME Group's FedWatch tool. But bets for monetary easing at its July meeting remain elevated, with markets pricing in a 67.9 percent chance of a 25 basis point cut.
The global dollar index .DXY fell to 97.469 at midday from the previous close of 97.558.
The offshore yuan CNH=D3 was trading at 6.934 per dollar as of midday.
The yuan market at 0412 GMT:
PBOC midpoint CNY=SAEC
Spot yuan CNY=CFXS
Divergence from midpoint*
Spot change YTD
Spot change since 2005 revaluation
Thomson Reuters/HKEX CNH index
*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 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
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