China's yuan edged up against the dollar on Tuesday morning, supported by continued optimism over a preliminary trade deal reached between China and the United States. Markets were cheered after President Donald Trump said over the weekend the United States and China would "very shortly" sign their Phase 1 trade pact.
But, market volatility was low on Tuesday morning, with many participants already away for the holidays. Some institutions took advantage of the narrow price swings in the onshore spot yuan to make multiple intra-day trades for quick profits, traders said.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 7.0119 per dollar, 2 pips weaker than the previous fix of 7.0117. In the spot market, onshore yuan opened at 7.0140 per dollar and was changing hands at 7.0104 at midday, 21 pips firmer than the previous late session close.
Despite the yuan trading in narrow ranges, swap points in onshore forwards market fell to reflect ample liquidity and heightened expectations of further policy easing. Swap, or forward points, are the number of basis points added to or subtracted from the spot rate of a currency pair to determine the forward rate for delivery on a specific date.
One-year dollar/yuan swap points fell to a low of 417.5 points on Tuesday morning, the lowest since Dec. 13. Several traders attributed declines in swap points to Premier Li Keqiang's remarks that the government will consider rolling out more measures to support economic activity. These include broad-based and "targeted" cuts in banks' reserve requirement ratio (RRR) and in re-lending and re-discounting loans.
Inter-bank borrowing costs also fell on Tuesday, with the volume-weighted average rate of China's benchmark seven-day repo traded in the inter-bank market falling to the lowest since April 2010. Still, some analysts and traders warned that the market lacked clear direction as a preliminary trade deal had been reached but was not yet signed. Chi Lo, senior economist for Greater
China at BNP Paribas Asset Management, said there would be no final settlement on China's trade dispute with the United States for a long time to come because the ultimate economic problem lies in the global saving-investment imbalance. "A further rise in trade tensions in the short-term may prompt China to scale back on its FX intervention and allow the renminbi to weaken further under market forces as part of the negotiation tactic," he said in a note.
"This does not mean that China has a devaluation policy, but it does imply that the tail risk of the trade war igniting another round of currency war has risen." The global dollar index rose to 97.678 at midday from the previous close of 97.658. The offshore yuan was trading at 7.0095 per dollar as of midday.