Yuan briefly eases to 1-week low as downbeat inflation opens door for rate cut

SHANGHAI/SINGAPORE, April 11 (Reuters) - China's yuan briefly eased to a more than one-week low against the dollar before recovering by midday on Tuesday, pressured by market perceptions of a possible interest rate cut to prop up the broad economy after downbeat inflation data. China's consumer inflation in March hit its slowest pace since September 2021, weighed down by sluggish food prices, official data showed on Tuesday, suggesting demand weakness persists amid an uneven economic recovery. The sluggish inflation data raised market hopes for an interest rate cut as soon as next week, currency traders said. "The emerging disinflationary pressure suggested that consumption demand recovery was relatively slow in the absence of flooding fiscal stimuli and residents were not comfortable to increase their spending even after the lift of COVID restrictions," said Ken Cheung, chief Asian FX strategist at Mizuho Bank. Monetary easing should theoretically pressure the currency in the short term, but improved economic fundamentals will support the yuan over the long run, traders said. China is scheduled to roll over its medium-term policy loans on April 17 and release the monthly fixing of benchmark loan prime rate (LPR) next Thursday. Before the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.8882 per dollar, 118 pips weaker than the previous fix of 6.8764, the weakest level since March 30.

In the spot market, the spot yuan opened at 6.8880 per dollar and eased to a low of 6.8935 at one point, the softest level since April 3. However, it recovered all losses by midday and traded at 6.8832, 3 pips firmer than the previous late session's close. Traders said the weakness in morning deals prompted many investors to liquidate their short yuan positions and take profits. "The yuan is likely to continue swinging in ranges for the time being," said a trader at a Chinese bank. China is due to report March credit lending and trade data this week, and first quarter gross domestic product (GDP) and activity indicators next week. Currency traders widely believe these figures could offer a more comprehensive picture of the broad domestic economy. "We expect Beijing to step up policy support in coming months, as the low CPI and PPI inflation readings could provide Beijing with more room for stimulus," said Ting Lu, chief China economist at Nomura. "The PBOC just cut the reserve requirement ratio (RRR) by 25 basis points at the end of March. However, Beijing still has no appetite to launch a massive stimulus on concerns of distortions and financial risks."

By midday, the global dollar index rose to 102.38 from the previous close of 102.092, while the offshore yuan was trading at 6.888 per dollar.

The one-year forward value for the offshore yuan traded at 6.7258 per dollar, indicating a 2.41% appreciation within 12 months.

The yuan market at 0406 GMT:

ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8882 6.8764 -0.17% Spot yuan 6.8832 6.8835 0.00% Divergence from -0.07%
midpoint*
Spot change YTD 0.24% Spot change since 2005 20.24% revaluation

Key indexes:
Item Current Previous Change

Dollar index 102.38 102.092 0.3

*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 6.888 -0.07%
*
Offshore 6.7388 2.22% 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 Tom Westbrook)

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