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China's yuan fell slightly against the US dollar on Monday after a weaker official midpoint fixing, and on views that the central bank will stick to a very modest and gradual pace of monetary tightening to avoid hurting economic growth.
China's central bank surprised markets by raising short-term interest rates for the third time in as many months last week, in what economists said was a bid to stave off capital outflows and keep the yuan stable after the Federal Reserve raised US rates hours earlier.
Still, while China's leaders have made tackling debt risks a major priority this year, most traders expect only small tightening steps this year. Heavy stimulus was required last year to get the economy back on better footing.
The People's Bank of China set the midpoint rate at 6.8998 per dollar prior to market open, weaker than the previous fix of 6.8873.
The spot market opened at 6.9060 per dollar and was changing hands at 6.9036 at midday, 6 pips weaker than the previous late session close and 0.06 percent weaker than the midpoint. The yuan traded within a very tight range between 6.9075 and 6.9035 per dollar in the morning.
"The increase in short-term interest rates by the central bank last week was just a one-off knee-jerk reaction to the Fed's rate decision, and the impact has quieted down now," said a trader at a Chinese bank in Beijing.
The Fed is not expected to raise rates again for at least another three months. "China will not in rush to hike benchmark lending and deposit rates any time soon given muted inflationary pressure as well as demand for economic stability prior to 19th Party Congress," OCBC analysts said in a note on Monday. A major leadership reshuffle at congress later this year could bring more of President Xi Jinping's allies into the country's top leadership team.
But analysts are not sure if future policy moves will be synched with the Fed's, and domestic risks will keep policymakers on guard. Data on the weekend showed China's red-hot property market picked up pace in February after price gains had slowed in the previous four months, in spite of a raft of new government curbs aimed at tempering speculative demand.
"Bottom line: The January-February housing data indicate that macroprudential measures need to be tightened for our baseline scenario of a housing-driven slowdown in real estate investment to materialize," ING said in a note.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.2, weaker than the previous day's 94.46. The global dollar index fell to 100.16 from the previous close of 100.3.
The offshore yuan was trading 0.23 percent stronger than the onshore spot at 6.8877 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 7.1098, -2.95 percent weaker than the midpoint.
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