Yuan firms as dollar continues retreat

Global flash points weigh on US Treasuries

China’s yuan firmed against the greenback on Tuesday, as the country’s central bank set a stronger midpoint following an overnight retreat in the dollar index.

The People’s Bank of China set the midpoint rate at 6.8957 per dollar prior to the market’s open, firmer than the previous fix of 6.9042.

In spot market trading, the yuan opened at 6.9036 per dollar and was changing hands at 6.9034 at midday, 16 pips higher than the previous late session close.

The dollar was little changed in Asian trading on Tuesday following the previous session’s decline, as concerns over tensions with North Korea and Syria weighed on US Treasury yields and offset expectations of US interest rate hikes.

The yuan has been fluctuating within a narrow range against the dollar this year, after slumping 6.5 percent in 2016.

Like many other emerging market currencies, it has benefited from an unexpected retreat in the dollar in recent months, which along with tighter Chinese capital controls has helped to staunch capital outflows and expectations of further depreciation.

Indeed, in its latest yuan report, Macquarie Capital forecast the yuan would end this year at 6.9 against the dollar, little changed from where it ended in 2016.

Following a vicious cycle of outflows and depreciation, “the government substantially tightened capital controls from the second half of 2016, which has largely worked. Meanwhile, foreign money has been returning... via FDI and bond investments,” Macquarie analyst Larry Hu wrote. “A harder task is how to restart [ yuan] internationalization, which was disrupted by capital outflows three years ago.”

However, most currency strategists surveyed by Reuters earlier this month predict the yuan will weaken through the 7.0 level by late 2017 and fall further to 7.10 in a year as the dollar regains its footing.

The dollar index, which gauges the US currency against a basket of six major peers, was slightly down on the day at 101.010.

The benchmark 10- year yield fell to 2.340 percent in Asian trading, from its US close of 2.361 percent on Monday.