China's yuan holds ground ahead of Fed outcome

SHANGHAI: China's yuan remained steady against the dollar on Wednesday, despite the central bank issuing a more robust official guidance rate. The dollar held onto recent gains, trading near multi-week highs against several major currencies before the Federal Reserve's policy announcement later in the day, as investors remained passive awaiting the Fed's decision. The US Federal Reserve had been expected to initiate interest rate hikes, with traders anticipating the first of potentially multiple increases.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.7628 per dollar, marking the strongest level since February 3, 2023, and 480 pips less than a Reuters estimate of 6.7148. The spot yuan is permitted to fluctuate 2% above or below the fixed midpoint daily. Analysts from Maybank noted that recent fixings indicate a mild resistance to yuan appreciation, keeping the USD/CNH exchange rate flat.

Domestic demand in China appeared to be weakening, with activity data supporting the view. This came as no surprise, as the central bank had previously raised the guidance rate to bolster the yuan's value. In the spot market, the onshore yuan held steady at 6.7112 per dollar, while the offshore yuan increased by approximately 0.03% in Asian trading at 6.7116.

Official data released earlier revealed that China's industrial sector showed a resurgence in August as the AI-driven technology boom propelled factory output. However, the sluggish consumption and deteriorating investment climate raised concerns over the escalating economic imbalances. FX strategist Volkmar Baur from Commerzbank observed that the CNY's appreciation against the US dollar has recently lost momentum.

He attributed this to the weakening domestic economy, which he believes is likely to persist. Consequently, Baur anticipates only a gradual further appreciation of the CNY against the US dollar for the rest of the year.

Additionally, China's foreign exchange regulator has directed banks to encourage more corporate clients to hedge currency risks. This move reflects the regulator's efforts to protect exporters from the steady appreciation of the yuan.