China’s yuan weakened against the dollar on Monday as hopes of major US tax reforms continued to boost the greenback. The People’s Bank of China set the official yuan midpoint rate at 6.8898 per dollar prior to the market open, the weakest level in nearly four weeks and 79 pips softer than the previous fix at 6.8819.
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The dollar rebounded late last week after US President Donald Trump’s promise on Thursday of a “phenomenal” tax reform plan over the next two or three weeks continued to support the dollar against most of its major rivals.
It extended gains to a near two-week high on Monday. “The risk for RMB (to) weaken against the dollar is likely to be higher should Trump roll out his border tax adjustment, which is believed to be a dollar-positive event,” OCBC Bank said in a note on Monday.
In the spot market, traders said the market was “balanced” with some selling dollars to take profits on its recent bounce.
In the spot market, the yuan opened at 6.8910 per dollar and was changing hands at 6.8849 at midday, 74 pips weaker than the previous late session close but 0.07 percent firmer than the midpoint.
The dealer did not expect huge volatility in the yuan ahead of the annual session of China’s parliament, which takes place in early March.
Chinese policymakers usually keep a firm grip on the currency ahead of major events on the political calendar.
The latest China Foreign Exchange Trade System (CFETS) data showed that the index for the yuan’s value based on the market’s trade-weighted basket was unchanged at 94.03 on Friday compared with a week earlier.
Separately, the head of China’s foreign exchange regulator said in an interview with media published on Monday that China would not return to old capital controls or go backwards on its foreign exchange management policy.
In the money market, interest rates eased after the central bank resumed open market operations on Monday, after skipping reverse repurchase agreement deals for six straight trading days.
The PBOC injected 100 billion yuan ($14.53 billion), compared with 190 billion yuan of repos maturing on the same day. While the moves marked a net drain of 90 billion yuan on Monday, primary money rates fell due to few signs of pressure on liquidity conditions and on expectations that the central bank would roll over its temporary liquidity support and other instruments which are due to mature later this week.
The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was 2.4181 percent, dipping 0.25 basis points from the previous day’s closing average rate.
Temporary liquidity facility (TLF) loans are due to mature on Friday. The TLF is a new tool introduced by the central bank in mid-January to help keep major commercial banks flush with funds.
Some market participants said the TLF had added around 600 billion yuan in liquidity.
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