(Reuters) – SHANGHAI, June 30 – The Chinese yuan moved higher on Wednesday, bolstered by tighter liquidity constraints, but the currency is on track for its largest monthly depreciation since August 2019, thanks to a rally in the US dollar.
The People’s Bank of China (PBOC) fixed the midpoint rate at 6.4601 per dollar before the market opened, 34 basis points lower than the previous fix of 6.4567.
Onshore yuan began at 6.4625 per dollar in the spot market and was trading at 6.4571 at midday, 69 pips higher than the previous late session finish.
If the yuan ends the late night session at the noon level, it would have lost 1.33 percent against the dollar this month, snapping two months of advances and achieving its worst monthly performance since August 2019.
On Wednesday morning, some traders reported onshore and offshore yuan liquidity exhibited symptoms of strain, as evidenced by increases in short-term borrowing costs. Banks must keep enough cash on hand to meet month-end demand as well as certain administrative needs. The yuan was supported by such tightness.
The CNH Hong Kong Interbank Offered Rate benchmark (CNH HIBOR) for overnight tenor hit a new high of 9.741 percent in early trade, the highest since June 1, 2017, while the overnight repo in the onshore interbank market hit a new high of 4 percent, the firmest since February 1.
Meanwhile, traders warned that temporary closures of certain big state-run banks in Beijing ahead of the Chinese Communist Party’s 100th anniversary festivities on July 1 had decreased trade volumes and liquidity, increasing market volatility.
Investors were hesitant to take huge wagers, according to a trader at a Chinese bank, partially due to the celebrations and concerns over a major U.S. job report due on Friday that could alter the Federal Reserve’s policy plans.
Separately, some analysts predict that the yuan would experience greater two-way volatility in the second half of the year, owing to an uneven domestic economic recovery.
“The issue of unequal domestic recovery may linger in the next quarters,” said Marco Sun, MUFG Bank’s senior financial market analyst, who expects the yuan to trade between 6.44 and 6.48 per dollar in the short term.
China’s economic rebound slowed in June, according to recent data. In June, factory activity fell to a four-month low as a result of increasing raw material costs, a semiconductor scarcity, and a COVID-19 outbreak in Guangdong.
The global dollar index slipped to 92.041 around lunchtime, down from 92.066 at the previous closing, while the offshore yuan was trading at 6.4622 per dollar.

At 0414 GMT, the yuan market was as follows:

PBOC midpoint 6.4601 6.4567 -0.05 percent ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.4601 6.4567 -0.05 percent

6.4571 6.464 0.11 percent Chinese yuan spot

Spot change YTD 1.10 percent, divergence from -0.05 percent midpoint*
Since 2005, there has been a spot change. Revaluation of 28.18 percent

Indexes that are important:

Item Previous Change Previous Item

97.96 97.95 0.0 Thomson 97.96 97.95 0.0
Dollar index 92.041 92.066 0.0, Reuters/HKEX CNH index 92.041 92.066 0.0, Reuters/HKEX CNH index 92.041 92.066

*The exchange rate between the US dollar and the Chinese yuan has diverged. If the figure is negative, it means the spot yuan is trading higher than the midpoint.
The People’s Bank of China (PBOC) allows the official midpoint rate, which it sets each morning, to climb or fall by 2%.
CNH MARKET OFFSHORE

Instrument Current Distinction from the Onshore
Offshore spot yuan 6.4622 -0.08% * Offshore 6.6276 -2.53 percent non-deliverable forwards ** Offshore 6.6276 -2.53 percent non-deliverable futures

*Premium for an offshore location over an onshore location **

Since non-deliverable forwards are settled against the midpoint, the figure indicates the discrepancy from the PBOC’s official midpoint.
(Winni Zhou and Andrew Galbraith contributed reporting; Jacqueline Wong edited the piece.)
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