China’s yuan holds steady while waiting for signs of economy bottoming

SHANGHAI: China’s yuan held steady on Friday while its offshore counterpart managed light gains against a robust U.S. dollar, as investors looked for signs of stabilisation in a wobbly economy and expectations grew for monetary easing.

Profits at China’s industrial firms grew for a second month in September, adding to signs of a stabilising economy as the authorities launched a burst of supportive policy measures.

Meanwhile, investors are increasingly expecting further monetary easing after the government announced fresh borrowing and stimulus measures, which may further widen the yield gap between China and the United States and pile pressure on the yuan.

“This will sharpen the divergence between the looser path of monetary policy and a (virtually pegged) renminbi that is strengthening with the U.S. dollar,” said Alvin Tan, head of Asia FX strategy.

The offshore yuan was trading 22 pips weaker than the onshore spot at 7.3189 per dollar. It firmed after the industrial profits data, trading around 7.3201 versus a close of 7.3230.

In the offshore market, overnight yuan HIBOR, a key measure of liquidity, slumped 178 basis points to 1.33% on Friday, the lowest level since Oct. 9.

The offshore yuan overnight HIBOR typically trades around 1-3%.

Prior to the market’s opening, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1782 per U.S. dollar, 2 pips firmer than the previous fix 7.1784.

Friday’s fix was set at its strongest level in two weeks, though market participants were not surprised, with fixes persistently hovering around the 7.17-7.18 level against the dollar.

The spot yuan opened at 7.3123 per dollar and was changing hands at 7.3167 at midday, only 9 pips weaker than the previous late session close and 1.93% away from the midpoint.

The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day.

The global dollar index fell to 106.554 from the previous close of 106.602. – Reuters