China's yuan eases from 2-week high as COVID cases rise again



SHANGHAI, Aug 11 (Reuters) - China's yuan eased on Thursday from the previous day's two-week high as rising COVID-19 infections and fresh lockdowns added to worries about the country's slow and uneven economic recovery.

The currency was also pressured by a pledge from the People's Bank of China (PBOC) to maintain ample liquidity in the financial system, offsetting the impact of broad dollar weakness following lower-than-expected U.S. inflation readings.

COVID cases continued to rise, with 2,166 new infections reported on Wednesday, nearly double the figure a day earlier. While very low by global standards, China continues to enforce a tough "dynamic COVID-zero" policy even for small outbreaks.

Currency traders said stringent anti-virus measures could again disrupt the economy, just as many businesses and consumers are clawing their way back from extended lockdowns in spring which sent activity into a tailspin.

Prior to the market opening, the PBOC set the midpoint rate CNY=PBOC at 6.7324 per dollar, 288 pips or 0.43% firmer than the previous fix of 6.7612, the strongest since July 14.

In the spot market, the onshore yuan CNY=CFXS opened at 6.7300 per dollar and was changing hands at 6.7389 at midday, 144 pips weaker than the previous late session close.

The yuan hit a high of 6.7230 late on Wednesday, the loftiest level since July 28, as the dollar eased following a cooler-than-expected U.S. inflation report. The data raised expectations of a less aggressive Federal Reserve interest rate hike cycle than previously anticipated.

"It remains early too early to say the U.S. inflation peaked," said a trader at a foreign bank, noting changes in U.S. inflation, a key factor deciding the Fed's monetary tightening trajectory, would continue to affect the dollar and other major currencies.

Meanwhile, China's central bank reiterated that it would step up the implementation of prudent monetary policy and keep liquidity reasonably ample.

Widening divergence in monetary policy between China and other major economies could risk capital outflows and yuan depreciation.

"We believe that China rates should stay low given the risk to growth being on the downside," strategists at Morgan Stanley said in a note this week.

"But we are less bearish on the yuan as it is more driven by the balance of payments these days rather than China growth," they said, expecting the PBOC to keep the yuan stable ahead of the politically significant 20th Party Congress later in the year.

By midday, the global dollar index .DXY stood at 105.376, while the offshore yuan CNH=D3 was trading at 6.7368 per dollar.

The yuan market at 0400 GMT:

ONSHORE SPOT: Item

Current Previous Change PBOC midpoint

6.7324 6.7612

0.43% CNY=SAEC

Spot yuan

6.7389 6.7245

-0.21% CNY=CFXS

Divergence from

0.10%

midpoint*

Spot change YTD

-5.70% Spot change since 2005

22.82% revaluation

Key indexes:

Item

Current

Previous Change

Thomson

0.0 Reuters/HKEX

CNH index

Dollar index

105.376

105.196 0.2

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET Instrument

Current Difference

from onshore Offshore spot yuan

6.7368

0.03% CNH= *

Offshore

6.6669

0.98% 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 Winni Zhou and Brenda Goh; Editing by Kim Coghill

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