China's yuan steady as PBOC hints about bond sales push up yields
SHANGHAI, July 5 (Reuters) -China's yuan held steady on Friday against the U.S. dollar as yields for Chinese government bonds rose across the curve amid hints from the central bank that it could embark on large-scale bond sales.
The People's Bank of China (PBOC) has hundreds of billions of yuan worth of medium- and long-term bonds at its disposal to borrow and sell, it said on Friday - part of plan markets see as an effort to cool a powerful bond rally.
Higher China government bond yields and a narrower spread against U.S. treasury counterparts could help alleviate pressure on the yuan, said Samuel Tse, economist at DBS.
Not everyone was convinced, however, that the PBOC could have a lasting impact.
The "forces pushing down yields seem unlikely to reverse anytime soon," Julian Evans-Pritchard, head of China Economics at Capital Economics, wrote in a note to clients.
"Without wider monetary tightening, which doesn't appear to be on the cards, the best the PBOC can probably hope to achieve is to engineer a short-term pause to the bond rally," he added.
Spot yuan CNY=CFXS opened at 7.2630 per dollar and was trading at 7.2694 as of 0254 GMT, 4 pips firmer than the previous late session close and 1.97% weaker than the midpoint.
Prior to the market opening, the PBOC set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.1289 per dollar, 1,415 pips firmer than a Reuters' estimate.
Also supporting the yuan was a weaker dollar .DXY. The dollar index dropped to 105.02 on Friday, near a 3-week low.
Among Chinese government bonds, the 10-year tenor CN240004= was up over 1 basis point after touching a 22-year low earlier this week.
The yuan is 2.3% weaker this year. It has been under pressure since early 2023 due to a moribund property sector, anaemic consumer spending and a struggling stock market. The bond rally since the start of this year has only added to the pain.
"We continue to remain bearish on the yuan especially given the subtle change in FX stance of PBOC recently," Maybank analysts said in a note.
In cash settlement transactions, the yuan was quoted at CNYONOR= 7.2718 per dollar, implying that in the shortest tenor deals it had already hit its lower end of daily trading band.
Key onshore vs offshore levels:
• Overnight dollar/yuan swap onshore -23.00 pips vs. offshore -23.00
• Three-month SHIBOR SHIBOR= 1.9 % vs. 3-month CNH HIBOR 3.1 %
LEVELS AT 02:54 GMT
INSTRUMENT | CURRENT vs USD | UP/DOWN(-) VS. PREVIOUS CLOSE % | % CHANGE YR-TO-DATE | DAY'S HIGH | DAY'S LOW |
Spot yuan <CNY=CFXS | 7.2694 | 0 | -2.3 | 7.263 | 7.269 |
Offshore yuan spot CNH=D3 | 7.2918 | 0.04 | -2.28 | 7.289 | 7.293 |
Reporting by Shanghai Newsroom; Editing by Edwina Gibbs
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