China's yuan shows signs of recovery against dollar

China's yuan showed signs of recovery against the dollar, set to break a three-week streak of losses after Beijing's announcement of a significant reduction in bank reserves. The move, aimed at shoring up the fragile economy and stabilising stock markets, has underscored China's commitment to supporting yuan assets. However, analysts caution that while the short-term impact is positive, fundamental dynamics remain challenging.

Commenting on the situation, Lemon Zhang, FX strategist at Barclays, noted that the 50-basis-point reserve requirement ratio (RRR) cut, coupled with a hold on the medium-term lending facility (MLF) rate, signals a preference for liquidity management. Zhang anticipates a rally in front-end rates while suggesting that the yuan may trade within a range.

The People's Bank of China (PBOC) set the midpoint rate, around which the yuan fluctuates in a 2 per cent band, at 7.1074 per dollar, slightly weaker than the previous fix. The central bank's consistent practice of setting official guidance rates at firmer levels than market projections is viewed as an attempt to maintain currency stability.

In the spot market, the onshore yuan opened at 7.1730 per dollar, softening to 7.1784 at midday. If the yuan maintains this level through the late-night session, it is poised to record a 0.2 per cent gain against the dollar for the week, marking its first weekly increase in four weeks.

Currency traders highlight that recent movements in the yuan and broader market sentiment have been influenced significantly by A shares. The morning's slight yuan weakness is attributed to losses and outflows through the Stock Connect trading link with Hong Kong.

While the Chinese blue-chip CSI300 Index and the Shanghai Composite index experienced minor declines, Chinese stocks had rebounded earlier in the week following support measures.

By midday, the global dollar index retreated, and the offshore yuan traded at 7.1836 per dollar. The nuanced movements in the yuan continue to reflect the intricacies of China's economic landscape, where policymakers balance immediate support with the need for sustained stability.

(With Reuters inputs)