Yuan hovers at 5-month high ahead of US CPI; FX demand for tourism may pick up

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SHANGHAI — China’s yuan hovered at a

five-month high against the dollar on Thursday, as investors

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awaited U.S. inflation data later in the session for more clues

on the monetary policy outlook in the world’s largest economy.

Yuan trades since the start of this year were on an upward

trend, shrugging off dollar movement in global markets,

supported by border reopening optimism and seasonal heavy

demand, currency traders said. But with sentiment gradually

stabilizing, the greenback and the pace of U.S. tightening will

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again become key factors.

“Uncertainty around the U.S. tightening trajectory is still

high,” said a trader at a Chinese bank.

Markets expect that the Federal Reserve may be nearing the

end of its aggressive monetary policy tightening campaign and

that it may not have to raise rates as high as previously

feared.

Prior to market opening, the People’s Bank of China (PBOC)

set the midpoint rate at 6.7680 per dollar, 76 pips

or 0.11% firmer than the previous fix of 6.7756.

The onshore yuan opened at 6.7590 per dollar and

was changing hands at 6.7580 at midday, 70 pips firmer than the

previous late session close. It was not far from a near

five-month high of 6.7510 hit on Tuesday.

The yuan has gained 2.1% against the dollar so far this

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year, reversing some of the losses it booked in 2022, which

amounted to the biggest annual loss in 28 years.

Currency traders said the sudden fast yuan appreciation

might have come to an end as markets have largely digested the

reopening optimism, while heavy seasonal conversions of export

proceeds ahead of the Lunar New Year would ebb soon.

China’s week-long Lunar New Year holiday starts on Jan. 21.

“Although the yuan strength continued, we don’t think it

will be smooth sailing,” analysts at OCBC Wing Hang Bank said in

a note.

“Domestic service trade deficit has room to grow, while the

goods trade surplus may shrink as imports rebound,” they added,

targeting the yuan at 6.75 per dollar by the end of this year.

Some banks also told their clients that the short-term yuan

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depreciation pressure may quickly emerge again as companies

gradually head for the Lunar New Year holidays and their foreign

exchange settlements greatly decline.

“And in the meantime, FX purchases against the backdrop of

resumed outbound tourism will increase,” said a second trader at

a Chinese bank.

Such currency demand surrounding outbound tourism

contributed to a huge portion of the service trade deficit

before the pandemic.

The yuan market at 0350 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.768 6.7756 0.11%

Spot yuan 6.758 6.765 0.10%

Divergence from -0.15%

midpoint*

Spot change YTD 2.10%

Spot change since 2005 22.47%

revaluation

Key indexes:

Item Current Previous Change

Thomson 0.0

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Reuters/HKEX

CNH index

Dollar index 103.098 103.188 -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 6.7663 -0.12%

*

Offshore 6.6203 2.23%

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 Winni Zhou and Brenda Goh)