China’s yuan bounces from one-month low, policy lending rate held

China’s yuan weakened to a one-month low against the dollar on Monday but managed to bounce back by midday, while the central bank surprised markets by leaving its medium-term policy rate unchanged despite expectations of a cut to bolster the economy. The People’s Bank of China (PBOC) stood pat on the rate for one-year medium-term lending facility loans, amid signs that currency weakness is limiting the scope for monetary easing. Despite the steady policy rate, markets still expect some form of monetary easing in response to persistent deflationary pressure.

“Policy focus has shifted to the effectiveness of monetary policy. Today’s hold means the chance of a reserve requirement ratio (RRR) cut in February is higher,” analysts at ANZ said in a note. “The authorities will tend to maintain ample liquidity as the Lunar New Year approaches.

” China’s week-long new year holiday will start on Feb. 10. Prior to the market opening, the PBOC set the midpoint rate at 7.

1084 per dollar, 34 pips weaker than the previous fix of 7. 1050. The yuan is allowed to trade in a 2% band either side of the midpoint.

The central bank continued its months-long practice of setting the official guidance rate at firmer levels than the market’s projections, traders and analysts said, which is widely seen as an attempt to prevent the yuan from falling too rapidly. Monday’s midpoint was 600 pips firmer than a Reuters estimate of 7. 1684.

In the spot market, the onshore yuan opened at 7. 1806 per dollar and weakened to a low of 7. 1813, the softest level since Dec.

13. It recouped all of the intraday losses by midday, however, to trade at 7. 1683, up 7 pips versus the previous late session close.

Currency traders said the yuan’s turnaround in morning deals was underpinned by state banks, who sold dollars in the onshore spot market to prevent the yuan from sliding too fast, while a wobbling U. S. dollar also lent support to the local currency.

Uncertainty around when the U. S. Federal Reserve will start cutting interest rates should continue to bring volatility to the yuan, traders and analysts said, but the world’s two largest economies are expected to move in the same direction in 2024 to narrow yield differentials and alleviate downside pressure on the Chinese currency.

“As other major economies enter an easing cycle, such a strong grasp on FX stability will become less necessary in 2024 and less of a constraint for pro-growth monetary policies,” analysts at HSBC said in a note. They revised up their forecast for the yuan to trade at 7. 1 per dollar at end-2024, from 7.

3 previously. Some currency traders said they would focus their attention on China’s fourth-quarter and full-year gross domestic product (GDP) data due on Wednesday. China will also release several economic activity indicators for December, including industrial output, investment and retail sales.

By midday, the global dollar index had fallen to 102. 33 from the previous close of 102. 404, while the offshore yuan was trading at 7.

1782 per dollar. The yuan market at 0324 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7. 1084 7.

105 -0. 05% Spot yuan 7. 1683 7.

169 0. 01% Divergence from 0. 84% midpoint* Spot change YTD -0.

98% Spot change since 2005 15. 46% revaluation Key indexes: Item Current Previous Change Thomson 0. 0 Reuters/HKEX CNH index Dollar index 102.

33 102. 404 -0. 1 *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 7.

1782 -0. 14% * Offshore 6. 9865 1.

74% 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 Shanghai Newsroom; Editing by Edmund Klamann).