China's yuan eases as dollar makes broad gains on easing global inflationary pressures

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By Georgina Lee

HONG KONG, Feb 3 (Reuters) - China's yuan eased on Friday from a three-week high, as the U.S. dollar recovered ground against other major currencies on prospects for monetary loosening beyond the United States after dovish signals from central bankers in Europe and the UK.

The spot yuan CNY=CFXS opened at 6.7400 per dollar and was changing hands at 6.7440 at midday, 83 pips weaker than the previous late session close and 0.09% away from the midpoint.

The People's Bank of China set the midpoint rate CNY=PBOC at 6.7382 per U.S. dollar prior to market open, weaker than the previous fix at 6.713. The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day.

The weakness in the yuan mirrored a broader decline among Asian currencies, as investors took a dovish cue from central bankers in Europe and the UK, said Christopher Wong, FX strategist at OCBC Bank.

Policy makers at the European Central Bank (ECB) and Bank of England (BOE) said on Thursday inflationary pressures in their economies have become more manageable.

"The decline in the USD is showing tentative signs of slowing as it appears that the U.S. central bank is not the only one calibrating its tightening pace, both ECB and BOE are potentially doing so in due course," he said.

The global dollar index .DXY rose to 101.839 from the previous close of 101.75.

The offshore yuan CNH=D3 was trading 0.03% weaker than the onshore spot at 6.746 per dollar.

While the reopening of China's economy following the removal of strict COVID-19 controls has improved sentiment, it is not necessarily positive for China’s balance of payments and the yuan, according to Sophie Altermatt, an economist at Julius Baer.

"We believe that headwinds come from a reversing goods trade balance due to a slowdown in external demand. While imports benefit from a pick-up in domestic demand," she said, adding that once Chinese people start traveling abroad again it could also increase the potential for capital outflows.

"These effects could offset capital inflows due to improved sentiment towards Chinese assets," Altermatt said in a research note.

The one-year forward value for the offshore yuan CNH1YOR= traded at 6.6105 per dollar, indicating a roughly 2.05% appreciation within 12 months.

The currency market barely reacted toa China services sector survey showing activity in January expanded for the first time in five months due to higher spending and travel during the Lunar New Year after the removal of stringent COVID-19 curbs.

The Caixin/S&P Global services purchasing managers' index (PMI) released on Friday rose to 52.9 in January from 48.0 in December.

"Although Friday's data is positive, it largely confirmed the official PMI data that was released earlier this week," said Alvin Tan, head of Asia currency strategy at RBC Capital Markets.

The yuan market at 3:24AM GMT:






PBOC midpoint CNY=SAEC




Spot yuan CNY=CFXS




Divergence from midpoint*


Spot change YTD


Spot change since 2005 revaluation





Difference from onshore

Offshore spot yuan CNH= *



Offshore non-deliverable forwards CNY1YNDFOR= **



*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC.

Reporting by Georgina Lee; Editing by Simon Cameron-Moore


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