Yuan weakens as investors stay cautious ahead of U.S. rate decision

China's yuan weakened against the dollar on Tuesday, as investors stayed cautious ahead of an expected rate hike by the U.S. Federal Reserve and took in stride more evidence of recovery in the pandemic-hit Chinese economy. China's non-manufacturing activity broke into expansion territory in January for the first time since September 2022, as consumption and travel recovered over the Lunar New Year holiday after Beijing dropped its stringent zero-COVID policy. The non-manufacturing purchasing managers' index (PMI) rose to 54.4 from 41.6 in December, data from the National Bureau of Statistics showed. The manufacturing indicator also rose to 50.1 from 47.0 in December. The positive data was no surprise as there had been other advance indicators such as travel bookings and box office sales that had previously pointed to strong consumption activities going into the Lunar New Year, said Alvin Tan, head of Asia currency strategy at RBC Capital Markets. "The yuan retraced some of its gain from the previous trading session as there is an overall sense of cautiousness ahead of key macro events and data this week," he said. The spot yuan opened at 6.7540 per dollar and was changing hands at 6.7560 at midday, 38 pips weaker than the previous late session close and 0.07% weaker than the midpoint. The People's Bank of China set the midpoint rate at 6.7604 per U.S. dollar prior to market open, firmer than the previous fix 6.7626. The spot rate is allowed to trade with a range 2% above or below the official fixing on any given day. The Federal Reserve will conclude its two-day meeting on Wednesday. The market is widely expecting a 25 basis point interest rate hike to bring the Fed funds rates to 4.5% to 4.75%. The Bank of England and European Central Bank rate decisions are due on Thursday. The global dollar index fell to 102.206 from the previous close of 102.276. By midday, the yuan was 2.1% firmer for the month. The offshore yuan was trading 0.03% weaker than the onshore spot at 6.7578 per dollar. The one-year forward value for the offshore yuan traded at 6.6227 per dollar, indicating a roughly 2.04% appreciation within 12 months. The yuan market at 0315 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 0.03% 6.7604 6.7626 Spot yuan -0.06% 6.756 6.7522 Divergence from midpoint* -0.07% Spot change YTD 2.13% Spot change since 2005 revaluation 22.51% OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan * -0.03% 6.7578 Offshore non-deliverable 2.02% forwards 6.6265 ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Georgina Lee; Editing by Jacqueline Wong)

Yuan weakens as investors stay cautious ahead of U.S. rate decision

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