Yuan firms as US dollar softens, but Covid case surge caps upside

China's yuan firmed on Tuesday against the US dollar, after the greenback pared back gains seen in the previous trading session, when the yuan hit a 10-day low.

Still, a resurgence of Covid-19 cases is capping the upside for the yuan so far this week, said Ken Cheung, chief Asian FX strategist at Mizuho Bank. China reported 28,127 new cases on Monday, edging towards a daily infection peak reached in April.

The latest wave is testing recent loosening that China has made to its zero-Covid policy.

"The path towards China's reopening will remain bumpy. I expect sporadic surges in Covid cases will lead to limited lockdown measures," said Cheung.

In the spot market, the yuan opened at 7.1578 per dollar and was changing hands at 7.1518 at midday, 152 pips stronger than the previous late session close.

The spot rate is currently allowed to trade withing a range 2 percent above or below each day's officially set midpoint. On Tuesday, the People's Bank of China set the midpoint at 7.1667 per dollar, weaker than the previous fix of 7.1256 and the weakest since November 11.

A shortened trading week in the United States due to the Thanksgiving holiday on Thursday is also thinning some trading interests in the yuan market, Cheung said.

In the United States, comments by Fed speakers overnight delivered few surprises. Cleveland Fed President Loretta Mester said in an interview to broadcaster CNBC Monday that the central bank can shift to smaller increments in interest rate rises from next month.

The global dollar index fell to 107.55 from the previous close of 107.835.

The offshore yuan was trading 0.05 percent weaker than the onshore spot, at 7.1554 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 6.9708, 2.81 percent away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.