China's yuan firmed against the dollar on Thursday as sliding U.S. bond yields kept the dollar under pressure, though traders say talk of further falls in the Chinese currency may intensify over the short term. Traders said the Chinese currency market was being "heavily" affected by volatility in the dollar after the Lunar New Year holiday, with lingering caution about the outlook for the yuan keeping its upside contained.
The People's Bank of China set the yuan midpoint rate at 6.8710 per dollar prior to market open, firmer than the previous fix at 6.8849. The spot market opened at 6.8720 per dollar and was changing hands at 6.8682 at midday, 33 pips firmer than the previous late session close and 0.04 percent stronger than the midpoint.
The yuan fell 6.6 percent against a surging dollar in 2016, its biggest annual drop since 1994, amid a rush of capital from emerging markets, including China, on expectations of a higher pace of rate increases by the U.S. Federal Reserve.
Since the beginning of the year, the offshore yuan has been stronger than the onshore yuan, a reversal of the longer term trend. "A stronger offshore spot is containing the onshore yuan from falling, but the gap is shrinking," a trader at Chinese bank said. The spread between onshore and offshore spot rates narrowed to around 200 pips on Thursday compared with a gap of around 300 pips a day earlier.
For the next several weeks, the yuan may enjoy a run of stability in the run-up to the annual gathering of the nation’s legislature in March, according to Standard Chartered’s Cheung.