Yuan rally hits speed bump as economy drags

The yuan slipped on Monday, taking a breather after six weeks of gains, as mixed economic data and the outlook for low short-term interest rates pushed it to the weak side of 7.1 per dollar.

In morning trade the yuan slipped about 0.3 per cent to 7.1112 per dollar. It had traded as strong as 7.0825 on Friday, its highest in more than a year, drawing state banks to buy dollars and slow the yuan's rise.

The yuan has gained about 2.4 per cent on the dollar since late July, mostly as the greenback has fallen in anticipation of US interest rate cuts. 

Trading on the strong side of 7.1 per dollar was not justified by the weak economic backdrop, National Australia Bank currency strategists said on Monday, though over the longer term, they expect a weakening dollar to lift the yuan.

On Monday a survey of mostly smaller exporters showed manufacturing activity swinging to growth last month. However, over the weekend, a broader purchasing managers' index survey for August showed factory activity sinking to a six-month low.

New home prices in China rose barely in August, a private survey showed, underscoring the fragility of recovery in a real estate sector roiled by the collapse of indebted developers.

Late on Friday China's central bank had also announced it had been buying short-term bonds and selling long-term bonds during August in order to shape the yield curve and anchor short-term rates.

Chinese government 10-year bond yields fell 2.8 basis points to 2.16 per cent on Monday. The offshore yuan traded at 7.1029 yuan per dollar.

The rest of the week's data calendar is sparse, leaving traders to focus on U.S. economics to drive the dollar and to monitor money flow in China for signs that exporters are beginning to convert a huge pile of dollars into yuan.

"We believe China’s reluctance to pursue RMB appreciation in August may buy exporters time to offload their dollar holdings without incurring significant currency losses," OCBC's head of Asia macro research, Tommy Xie, said in a note.

Prior to the market opening, the People's Bank of China set the midpoint rate <CNY=PBOC>, around which the yuan is allowed to trade in a 2 per cent band, at 7.1027 per dollar, its strongest since May.