Yuan holds steady as PBOC eases guidance, dollar firms

Hong Kong - China's yuan remained stable against the US dollar on Wednesday following the central bank's decision to lower the daily midpoint figure. The expectation of additional US interest rate increases capped the yuan's strength and bolstered the greenback. The onshore yuan ended 0.09% higher at 6.6746 per dollar, while the offshore yuan was up about 0.04% at 6.6736 per dollar.

Before the market opened, the People's Bank of China set the midpoint rate at 6.7191 per dollar, the weakest level since October 22 and 336 pips weaker than a Reuters estimate. Each day, the spot yuan is allowed to trade 2% above or below the fixed midpoint. The central bank has been easing its daily guidance on the yuan this month, after consistently strengthening it for a year.

This step was interpreted by traders and analysts as an attempt to control the pace of the currency's appreciation. In another move that could slow the yuan's gains, several Chinese banks are significantly raising dollar deposit rates, in some cases above US benchmarks. Analysts at Nanhua Futures noted that while the market's expectation of further US rate hikes no longer held, USD/RMB moved within a narrow range in the short term.

They also pointed out that while October export data remained strong, the trade surplus was still substantial, indicating that the RMB's broader appreciation trend had not ended. The dollar gained near a two-week high in early Asian trade on Wednesday, fueled by hotter-than-anticipated US inflation data and hawkish comments from Federal Reserve officials, who suggested a possible rate hike next month.

Fed funds futures now indicate a 91.9% chance of a 25-basis-point rate increase and a 9.1% chance of a 50-basis-point move in the upcoming session, according to CME Group's FedWatch tool.