China's yuan hits 3-1/2-year high on heavy holiday demand, PBOC guidanceReuters
January 24, 202212:37 PM GMT+8
SHANGHAI, Jan 24 (Reuters) - China's yuan advanced to a more than 3-1/2-year high against the dollar on Monday, guided by a much firmer central bank fixing and heavy corporate demand ahead of the Lunar New Year holiday.
Investors also anxiously await the Federal Reserve's policy meeting later this week, at which the U.S. central bank could reveal some comments on its plans to remove monetary stimulus this year.
The Fed is expected to raise rates as early as March, with several more increases seen over the year.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint at 6.3411 yuan per dollar, 81 pips, or 0.13%, stronger than the previous fix. It was the firmest since May 14, 2018.
In the spot market, the onshore yuan opened at 6.3359 per dollar and strengthened to a high of 6.3304, the loftiest level since May 14, 2018. By midday, it was changing hands at 6.3334, 62 pips firmer than the previous late session close.
Traders and market analysts said corporate yuan demand is typically heavier just before the week-long Lunar New Year holiday, which starts on Jan. 31 this year, as companies make payments such as employee bonuses.
"The yuan will be affected by the monetary policy divergence between China and the United States and the seasonal FX settlement this week," analysts at CICC said in a note.
The Chinese investment bank expects the yuan to fluctuate around 6.34 per dollar this week.
While the Fed is expected to tighten, its Chinese counterpart would probably ease further before the broad economy bottoms out following a slew of reductions to key rates.
"Given China's policymakers have changed the mindset to meet market expectation, we think China will not hesitate to roll out more easing measures if sentiment sours or economic recovery loses momentum," said Tommy Xie, head of Greater China research at OCBC Bank.
Widening monetary divergence between the world's two largest economies pressured the forwards market, with one-year dollar/yuan swaps falling to a low of 1,115 points on Monday morning, the lowest level since July 2020.
By midday, the global dollar index (.DXY) rose to 95.723 from the previous close of 95.642, while the offshore yuan was trading at 6.3345 per dollar.
China's yuan advanced to a more than 3-1/2-year high against the dollar on Monday, guided by a much firmer central bank fixing and heavy corporate demand ahead of the Lunar New Year holiday.