China's yuan eased against the dollar in thin trade on Monday, as investors stuck to familiar ranges in the final week of 2021 and the currency set for its second straight winning year.

Prior to the market open, the People's Bank of China (PBOC) set the midpoint rate at 6.3686 per dollar, 6 pips firmer than the previous fix of 6.3692.

In the spot market, the onshore yuan  opened at 6.3700 per dollar and was changing hands at the same level by midday, 28 pips weaker than the previous late session close.

Trade was subdued with the spot yuan swinging in a tight range of less than 100 pips, while trading volume shrank to $12.1 billion by midday from a normal half-day volume of about $15 billion.

Several traders said they have already squared their books for proprietary accounts and expected the yuan to hover at current levels in the last week of the year.

The Chinese currency is set for a second straight year of gains, on course to rise about 2.5% against the dollar. That would make it the best performing emerging market currency in 2021, underpinned by robust exports, a growing trade surplus and ample dollar liquidity onshore.

Some analysts question whether yuan strength can sustain next year when major economies are likely to tighten monetary policy, diverging from the PBOC's easing bias.

"In the near term, USD/CNH will likely stay in a range of 6.35-6.40 with some downside potential," Gao Qi, FX strategist at Scotiabank said in a note.

"We believe China's central bank will keep setting USD/CNY with an upward bias if needed to prevent any one-sided speculation on the yuan appreciation," he said, maintaining his short USD/CNH spot position into Q1 2022.

The central bank reiterated at its fourth-quarter monetary policy committee meeting that it would deepen foreign exchange reforms and increase yuan exchange rate flexibility while guiding companies and financial institutions to be "risk neutral".

By midday, the broad dollar indexfell to 96.084 from the previous close of 96.095, while the offshore yuan  was trading at 6.3723 per dollar.

 

The yuan market at 0401 GMT:

 

ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.3686 6.3692 0.01% CNY=SAEC Spot yuan 6.37 6.3672 -0.04% CNY=CFXS Divergence from 0.02% midpoint* Spot change YTD 2.49% Spot change since 2005 29.93% revaluation

Key indexes:

Item Current Previous Change

Thomson 102.07 102.01 0.1 Reuters/HKEX CNH index Dollar index 96.084 96.095 0.0

 

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore Offshore spot yuan 6.3723 -0.04% * Offshore 6.532 -2.50% non-deliverable forwards

*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 Winni Zhou and Andrew Galbraith; Editing by Sam Holmes)