China's yuan eases after reserve ratio cut; Fed decision in focus

SHANGHAI, March 20 (Reuters) - China's yuan eased against the dollar on Monday, pressured by prospects of higher liquidity after the Chinese central bank surprised dealers by lowering the amount of cash banks must set aside as reserves. As in markets elsewhere, the dominant factor was anxiety over whether Switzerland and major central banks will succeed in averting a potential global banking crisis, and uncertainty over what the Federal Reserve will do with interest rates when its policy meeting concludes on March 22. Traders still expect a quarter point hike from the Fed, even though the global banking sector remains susceptible to contagion risks following the collapse of Silicon Valley Bank, despite a rescue deal for troubled Swiss lender Credit Suisse. On the domestic front, the People's Bank of China (PBOC) surprised investors by saying on Friday it would cut the reserve requirement ratio (RRR) for all banks. And on Monday, China kept its benchmark lending rates unchanged for the seventh straight month in March. "The proactive economic policy further supports China's economic recovery in the months ahead," said Becky Liu, head of China macro strategy at Standard Chartered. "Implication on CNY is largely neutral, in our view. While the market initially may react slightly negatively due to a further monetary policy divergence, the prospects of growth divergence ahead will likely to offset such consideration." The onshore yuan opened at 6.8711 per dollar and was changing hands at 6.8974 at midday, 91 pips weaker than the previous late session close.

Prior to market opening, the PBOC set the midpoint rate at 6.8694 per dollar, 358 pips or 0.52% firmer than the previous fix of 6.9052.

"We expect yuan to remain in a range of 6.75-6.95 in near term, due to several conflicting forces including China's own fundamentals, the U.S. dollar, and global sentiments," said Lin Li, head of global markets research for Asia at MUFG Bank. By midday, the global dollar index rose to 103.862 from the previous close of 103.708, while the offshore yuan was trading at 6.8989 per dollar.

The one-year forward value for the offshore yuan traded at 6.7625 per dollar, implying a 2.02% appreciation within 12 months.

The yuan market at 0407 GMT:

ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8694 6.9052 0.52% Spot yuan 6.8974 6.8883 -0.13% Divergence from 0.41%
midpoint*
Spot change YTD 0.04% Spot change since 2005 19.99% revaluation

Key indexes:
Item Current Previous Change

Dollar index 103.862 103.708 0.2

*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 6.8989 -0.02%
*
Offshore 6.7627 1.58% 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 Brenda Goh; Editing by Simon Cameron-Moore)

Messaging: winni.zhou.thomsonreuters.com@reuters.net))

Reuters

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