Market News

SHANGHAI, Nov 30 (Reuters) - China's yuan strengthened to a two-week high against the dollar on Tuesday and looked set to notch a fourth straight monthly gain, underpinned by persistent corporate demand and signs of liquidity tightness in the money markets.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint at a near two-month high of 6.3794 yuan per dollar, 78 pips, or 0.12%, firmer than the previous fix of 6.3872.

The midpoint fix was largely in line with market forecasts, traders said, and it was 1 pip weaker than Reuters' estimate of 6.3793 per dollar.

In the spot market, the onshore yuan opened at 6.3788 per dollar and rose to a high of 6.3711, the strongest level since Nov. 16. By midday, it was changing hands at 6.3716, 160 pips firmer than the previous late session close.

If the yuan finishes the late night session at the midday level, it would have gained 0.52% against the dollar for the month.

Traders said along with the firmer guidance rate and persistent corporate conversion of their dollar receipts into the local currency, the yuan also gained support in early deals from tighter cash conditions in the domestic money markets due to month-end demand.

The volume-weighted average rate of the benchmark overnight repo traded in the interbank market was at 2.1739%, the highest level since Oct. 19. And dollar/yuan swap points for the same tenor also jumped to 23.5 points from previous close of 4.8.

While investor worries over the economic impact of the new Omicron coronavirus variant ebbed, some analysts raised the possibility of the variant affecting the U.S. Federal Reserve's policy tightening trajectory.

"We expect market risk appetite to improve after the short-term volatility ... But it is undeniable that market confidence would weaken after the outbreaks," said Marco Sun, chief financial markets analyst at MUFG Bank.

"If the situation of the Omicron variant deteriorates, the Fed may postpone its first interest rate hike," he said, adding the Fed outlook could stoke volatility in other major currencies, including the yuan.

Hu Yifan, regional chief investment officer and chief China economist at UBS Global Wealth Management, also argued that the yuan's value would eventually be determined by economic fundamentals and policy divergence between the world's two largest economies would pile downward pressure on the Chinese currency.

"We believe the yuan will have some mild depreciation from the current level, driven by shrinking yield gap between China and the United States. ... as the U.S. is slowly exiting quantitative easing while China is rolling out more easing measures," she said.

Hu expects China to lower the reserve requirement ratio (RRR) before the Lunar New Year holiday in late January next year, and forecast the yuan to weaken to 6.55 per dollar at end-March before hitting 6.60 in June.