SHANGHAI, Aug 27 (Reuters) - The yuan hit a seven-month high against the faltering dollar on Thursday, but its pace of appreciation slowed following two days of gains.
Investors are growing cautious ahead of Federal Reserve Chairman Jerome Powell's remarks later in the session that could affect future monetary policy trajectory in the United States. Any major tweaks could spell more volatility for the dollar and other major currencies.
Global markets are betting the U.S. central bank will introduce a new policy framework to fight persistently low inflation as early as next month. FRX/
Prior to the market opening onshore, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at a new seven-month high of 6.8903 per dollar, 176 pips or 0.26% firmer than the previous fix of 6.9079. Thursday's official guidance rate was the strongest since Jan. 23.
In the spot market, onshore yuan CNY=CFXS opened at 6.8888 per dollar and jumped to a high of 6.8824 at one point, the strongest level since Jan. 21. By midday, it was changing hands at 6.8826, 29 pips firmer than the previous late session close.
Several traders said many market participants built fresh long yuan positions after the spot price rose past the key 6.9 per dollar, which was previously considered a ceiling for the yuan in the short term.
Eugenia Victorino, head of Asia strategy at SEB, said that contrary to her expectations the market broadly shrugged off deepening tensions between the world's two largest economies amid fresh signs of deterioration in diplomatic ties.
"Considering that the risk premium related to geopolitics has faded, we now see limited upside for USD/Asia through end-2020," she said in a note, revising her forecast for the yuan to trade at 6.85 per dollar at the end of this year, up from 7.03 previously.
The United States on Wednesday blacklisted 24 Chinese companies and targeted individuals it said were part of construction and military actions in the South China Sea, its first such sanctions move against Beijing over the disputed strategic waterway.
Separately, the monetary policy department at the PBOC published a report in China Finance, a magazine run by the central bank, saying the PBOC vowed to continue with market-oriented exchange rate reform. It added that only maintaining a flexible exchange rate could help counteract the impact of external instability and uncertainty and maintain monetary policy autonomy.
The yuan market at 0414 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% from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
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