Yuan holds steady as central bank keeps lending rates unchanged

Yuan remains stable: China's yuan remained stability against the US dollar as the People's Bank of China (PBOC) refrained from implementing interest rate cuts in its market operations on Monday. The central bank's decision to keep benchmark lending rates unchanged, in line with market expectations, reflects limited room for monetary easing amid yuan depreciation concerns.

The PBOC's move follows last week's surprise decision to maintain the medium-term lending facility rate, indicating a cautious approach to policy adjustments. However, offshore yuan liquidity has exhibited signs of tightness, with Hong Kong's offshore yuan one-week CNH HIBOR, a gauge of offshore yuan liquidity conditions, surging to 4.95045 per cent, the highest level since September 26.

Simultaneously, the increased funding costs for yuan have elevated expenses for investors seeking to short the currency. Ahead of the market opening on Monday, the central bank set the midpoint rate at 7.1105 per dollar, 62 pips firmer than the previous fix and marking the strongest level in a week.

The spot yuan opened at 7.1940 per dollar, weakening to 7.1955 at midday, reflecting a 23-pip decline from the previous late session close. The global dollar index decreased to 103.171 from the previous close of 103.288. Offshore yuan traded 99 pips weaker than onshore spot at 7.2054 per dollar.

Despite the current stability, analysts at Barclays suggest that offshore yuan is likely to face mounting pressure, contributing to broader dollar strength. They maintain a USDCNY 7.35 end-Q1 forecast, anticipating the PBOC's firm stance on fixings to prevent sharp currency declines.

(With Reuters inputs)