Yuan inches higher on supportive guidance, rate differential

Credit: REUTERS/Thomas White

The yuan inched higher on Monday after the central bank set a firmer-than-expected guidance, while a steady fixing of a key benchmark lending rate also reinforced China's yield advantage over major economies.

SHANGHAI, Sept 21 (Reuters) - The yuan inched higher on Monday after the central bank set a firmer-than-expected guidance, while a steady fixing of a key benchmark lending rate also reinforced China's yield advantage over major economies.

Prior to the market's opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at 6.7595 per dollar, 4 pips weaker than Friday's fix of 6.7591, but still came in higher than market expectations.

In the spot market, onshore yuan CNY=CFXS opened at 6.7620 per dollar and was changing hands at 6.7575 at midday, 125 pips firmer than the previous late session close.

"Given the USD/CNY has traded firmly below 6.80, we think market will continue to sell USD/CNY on rally, which may allow RMB to overshoot in the near term on the back of favourable yield differential," said Tommy Xie, head of Greater China research at OCBC Bank in a note.

Rate differentials between China and other major economies have remained in favour of the yuan in recent months. The onshore yuan has risen over 6% on the dollar since late May.

Many market participants have shifted their attention to global index provider FTSE Russell, which is widely expected to announce the inclusion of Chinese government bonds in its World Government Bond Index (WGBI) later this week and help boost foreign capital inflows into China.

Earlier in the session, China kept its benchmark lending rate for corporate and household loans steady for the fifth straight month at its September fixing on Monday, as expected.

"The yuan has been supported by the PBOC not opting for the ultra-expansionary monetary policy of most central banks," analysts at Westpac wrote in a note.

"However, USD/CNY should consolidate in coming weeks, partly as U.S. election uncertainty tempers yuan gains."

Several traders said that as long as there is no threat to a Phase 1 Sino-U.S. trade deal signed earlier this year, the yuan is unlikely to be affected much by intensifying tensions between the two countries over a range of other issues.

A U.S. judge early Sunday blocked the Trump administration from requiring Apple Inc AAPL.O and Alphabet Inc's GOOGL.O Google to remove Chinese-owned messaging app WeChat for downloads by late Sunday.

The administration has stepped up its efforts over recent months to purge what it deems "untrusted" Chinese apps from U.S. digital networks.

The yuan market at 0402 GMT:

ONSHORE SPOT:

Item

Current

Previous

Change

PBOC midpoint CNY=SAEC

6.7595

6.7591

-0.01%

Spot yuan CNY=CFXS

6.7575

6.77

0.18%

Divergence from midpoint*

-0.03%

Spot change YTD

3.04%

Spot change since 2005 revaluation

22.48%

Key indexes:

Item

Current

Previous

Change

Thomson Reuters/HKEX CNH index

93.83

93.89

-0.1

Dollar index

92.777

92.955

-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 CNH= *

6.7552

0.03%

Offshore non-deliverable forwards CNY1YNDFOR= **

6.9098

-2.18%

*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC.

(Reporting by Winni Zhou and Andrew Galbraith Editing by Shri Navaratnam)

((winni.zhou@thomsonreuters.com; +86 21 2083 0100; Reuters Messaging: winni.zhou.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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