HONG KONG, Apr 1: China’s yuan firmed against the dollar on Wednesday, helped by better-than-expected factory sector activity, even though the central bank set a weaker midpoint for the currency for the fourth consecutive day. The official Purchasing Managers’ Index (PMI) edged up to 50.1 in March from February’s 49.9, stronger than the 49.7 predicted by analysts in a Reuters poll. The final HSBC/Market China Manufacturing PMI came in at 49.6, also slightly higher than a preliminary ‘flash’ reading of 49.2 but still below the level of 50 that separates an expansion in activity from a contraction. The People’s Bank of China set the midpoint rate at 6.1434 per dollar prior to the market opening, weaker than the previous day’s 6.1422. It was the weakest level since March 23.
The yuan opened at 6.1970 per dollar and was changing hands at 6.1961 near midday, 35 pips stronger than the previous close and 0.86 percent weaker than the midpoint. It traded in a tight range between 6.1935 and 6.1991 in morning trade.
The spot rate is currently allowed to trade within a range 2 percent above or below the official fixing on any given day.
Despite the improvement in the official PMI, data so far this year has indicated China’s economy has lost momentum despite monetary easing. Analysts expect more supportive measures to come to help the country reach its 7 percent growth target this year.
‘We maintain our forecast for the PBOC to lower the reserve requirement ratio (RRR) by another 100 bps and cut the policy rate further by 25 bps this year,’ said Liu Ligang, Greater China chief economist at ANZ. The offshore yuan was trading 0.13 percent weaker than the onshore spot at 6.2039 per dollar. Offshore one-year non-deliverable forwards (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.3375, or 3.06 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, companies are much warier of using the NDF to hedge, given the risk inherent in them. As a result the market has lost liquidity in recent years and has frequently proved to be an unreliable measure of market sentiment.
(AGENCIES)
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