SHANGHAI: China’s yuan slipped against a strengthening dollar on Friday but looked set for a third consecutive weekly rise as the central bank continued its efforts to keep the market stable with the country largely insulated from Middle East tensions.
The yuan has been one of the best-performing emerging market currencies since the outbreak of the Iran war in late February by gaining about 0.6% on the greenback. The resilience relative to its peers has resulted in an increase in its trade-weighted value, market watchers said.
“The yuan’s strength persisted even during days when the US dollar was rampant, leading to a rapid appreciation of the trade-weighted yuan index of more than 2%,” said Eugenia Victorino, head of Asia strategy at SEB.
“In response, the People’s Bank of China (PBOC) started to limit further yuan strength by April, as reflected by the widening of the deviation between the actual fixing and median estimates,” she said.
Victorino expects upside room for the yuan to be capped at around 6.75 per dollar over the next three months if the greenback fails to weaken much.
Prior to market opening on Friday, the PBOC set the midpoint at 6.8622 per dollar, 416 pips softer than a Reuters’ estimate of 6.8206.
The central bank has mostly set the official midpoint rate weaker than market expectations since November, a move that market participants interpreted as an attempt to rein in excess strength and keep the currency stable.
The gap between the official fixing and Reuters’ estimates widened to an average of 285 pips so far in April, compared with about 90 pips last month.
Based on Friday’s official guidance fix, the yuan CFETS basket index, which measures the yuan’s value against its major trading partners, stood at 99.88, up 1.93% year-to-date.
“We think the recent pace of nominal yuan appreciation versus trading partners may be less gradual than what policymakers are typically comfortable with, but has yet to cause significant discomfort, given the shifts in the external environment,” Barclays analysts said in a note.
In the spot market, the onshore yuan traded at 6.8255 per dollar as of 0251 GMT.
If it finishes the late-night close at the midday level, it would have strengthened 0.08% to the dollar for the week.
Its offshore counterpart last fetched 6.8255 per dollar.
Separately, developments around Middle East tensions remained a key market focus, currency traders said, noting they would monitor the possible meeting between the United States and Iran over the weekend.
China is due to release its monthly fixing of the benchmark loan prime rate (LPR) on Monday.
Major global investment banks now expect Beijing to keep official interest rates steady this year, scaling back earlier rate-cut calls.
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