Chinese yuan remains range-bound as US rate hike bets strengthen dollar

Chinese yuan edged higher against the US dollar on Wednesday but remained largely range-bound after the People's Bank of China (PBOC) set a weaker-than-expected daily midpoint, while rising expectations of further US interest rate hikes supported the greenback.

The onshore yuan was last trading 0.09% higher at 6.6746 per dollar, while its offshore counterpart gained around 0.04% to 6.6736 per dollar in Asian trade.

Before the market opened, the PBOC fixed the yuan midpoint at 6.7191 per dollar, its weakest level since October 22. The fixing was 336 pips weaker than a Reuters estimate. The spot yuan is permitted to trade within a 2% range on either side of the daily midpoint.


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The central bank has weakened its daily official guidance for the yuan this month after consistently setting stronger fixings for nearly a year. Traders and analysts interpret the shift as an effort to manage the pace of the currency's appreciation.

Further limiting the yuan's gains, several Chinese banks are sharply increasing dollar deposit rates, with some offering rates above US benchmarks, according to a Reuters report earlier this week.

Analysts at Nanhua Futures said expectations of continued yuan appreciation had moderated, keeping the dollar-yuan exchange rate within a relatively narrow range in the near term.

However, China's strong October export data and a still-sizeable trade surplus suggest the broader appreciation trend for the yuan may not have run its course, they added.

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Dollar supported by hawkish Fed outlook
The US dollar held on to its recent gains and traded near a two-week high in early Asian trade on Wednesday as stronger-than-expected US inflation data and hawkish comments from Federal Reserve officials reinforced expectations of further monetary tightening.

Markets are increasingly pricing in another US interest rate increase next month, providing support to the greenback and limiting gains in other currencies, including the yuan.

According to CME Group's FedWatch tool, interest rate futures implied a 91.9% probability of a 25-basis-point rate hike next month and a 9.1% chance of a larger 50-basis-point increase.

The outlook for US monetary policy and the PBOC's approach to managing the yuan's exchange rate are likely to remain key drivers for the Chinese currency in the near term.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.)