China’s yuan steadied against the dollar on Monday after posting it biggest monthly rise in
five in October, as investors largely stood sidelined ahead of the U.S. Federal Reserve’s policy meeting.
Currency traders said much of the market focus has shifted to the Fed meeting on Tuesday, where investors widely expect the U.S. central bank to announce a tapering of stimulus.
The Fed’s anticipated decision to pare back its massive bond buying could “boost the dollar and pressure (emerging market) currencies,” said a trader at a foreign bank.
“But markets have already priced in tapering, so if the Fed doesn’t announce it this week, it would be a huge surprise.”
Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.4192 per dollar, 285 pips or 0.44% weaker than the previous fix of 6.3907, the weakest level since Oct. 19.
In the spot market, the onshore yuan opened at 6.4068 per dollar and was changing hands at 6.4043 at midday, 3 pips firmer than the previous late session close.
Analysts at CIB Research said the Fed’s policy shift could prompt global capital flows moving into dollar-denominated assets and pile some depreciation pressure on non-dollar
currencies.
“Even if China’s current account surplus remains high, arbitrage trades will tighten domestic dollar liquidity. At that time, the yuan will have fix its overvaluation relative to the
dollar index,” they said.
Separately, a private survey on Monday showed China’s factory activity expanded at its fastest pace in four months in October, in contrast to an official survey, which showed manufacturing contracted for a second straight month. Some analysts believe neither survey appears to have taken the latest wave of coronavirus cases into account.
“The PMIs may understate the slowdown in the services sector given that the surveys mostly took place prior to the latest virus outbreaks which has since been detected in at least 13
provinces,” economists at Capital Economics said in a note.
“As a result, we continue to expect lacklustre economic growth over the coming quarters.”
At midday, the broad dollar index rose to 94.222 from the previous close of 94.196, while the offshore yuan was trading at 6.4036 per dollar.
– Reuters