China's yuan advanced further against the dollar on Friday, but at a much slower pace as the greenback made a broad recovery after US President Donald Trump said he wanted a "strong dollar".
The dollar traded above its recent lows against its major trading partners after Trump told CNBC in an interview in Davos that he ultimately wants the dollar to be strong, contradicting earlier comments made by Treasury Secretary Steven Mnuchin.
In the spot market, the onshore yuan opened at 6.3350 per dollar and was changing hands at 6.3280 at midday, 35 pips firmer than the previous late session close and 0.25 per cent stronger than the midpoint. The Chinese currency remained on course for its best week since September. The yuan's year-to-date gains stood at 2.8 per cent, following a rise of about 6.8 per cent against the dollar in 2017.
"We expect the current one-way appreciation to continue in the near term, but some correction of the currency should arrive in the next few months, due to the larger divergence in monetary policy between the People's Bank of China (PBOC) and the Federal Reserve," Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis said in a note on Friday.
Prior to market opening on Friday, the PBOC lifted its official yuan midpoint for the sixth straight day to 6.3436 per dollar, the strongest level since November 2015. Friday's midpoint was 288 pips, or 0.45 per cent, firmer than Thursday's fix of 6.3724 and was the strongest since November 5, 2015.
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If the spot yuan finishes the late night session at the midday level, it would have strengthened 1.2 per cent against the dollar for the week, the seventh straight weekly gain. And it would also register the best week since early September 2017.
However, the yuan trade's volume was subdued this week. The daily trading volume stood at US$4.531 billion as of midday, compared with around $15bn for half-day volume on normal trading days.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.64, firmer than the previous day's 96.4. The global dollar index fell to 89.148 from the previous close of 89.391. The offshore yuan was trading 0.05 per cent weaker than the onshore spot at 6.3309 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.4565, 1.75 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
