SHANGHAI: China's yuan firmed on Thursday, as the U.S. dollar was broadly sold off after a better-than-expected inflation reading boosted expectations for rate cuts in the world's largest economy.
U.S. consumer prices increased less than expected in April, suggesting that inflation resumed its downward trend at the start of the second quarter in a boost to financial market expectations for an interest rate cut in September.
The dollar index posted its largest one-day drop on Wednesday, helping the offshore yuan strengthen 0.3 per cent on the day.
The yuan was also helped by improved sentiment towards China's property market and a stock market rebound that has lured back some foreign investors in recent weeks.
"Key priority at this point would be to engineer a bottom for home prices," said Maybank analysts, adding that the yuan was boosted by reports that China might potentially buy millions of unsold homes.
The Chinese yuan has lost 1.7 per cent of its value against the dollar so far this year, and remains vulnerable in the face of a shaky economic recovery and policy and geopolitical challenges.
Prior to the market open, the People's Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2 per cent band, at 7.102 per U.S. dollar, 29 pips firmer than the previous fix of 7.1049.
The spot yuan opened at 7.2099 per dollar and was changing hands at 7.2156 at midday, 20 pips firmer than the previous late session close and 1.60 per cent away from the midpoint.
The global dollar index fell to 104.183 from the previous close of 104.345. The offshore yuan was trading only 4 pips weaker than the onshore spot at 7.216 per dollar.
The immediate focus for market participants will be a set of economic indicators, including home prices, retail sales and industrial output, due on Friday.
The yuan market at 0307 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 7.102 7.1049 0.04 per cent Spot yuan 7.2156 7.2176 0.03 per cent Divergence from 1.60 per cent midpoint* Spot change YTD -1.63 per cent Spot change since 2005 14.70 per cent revaluation *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 per cent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 7.216 -0.01 per cent * Offshore 7.0105 1.31 per cent non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. - Reuters
