China's yuan firms despite worries over first Omicron cases in some cities

China's yuan firmed against the dollar on Monday, as corporate demand ahead of the Lunar New Year offset expectations of an early US interest rate hike and worries over the first cases of the Omicron Covid-19 variant reported in the city of Tianjin.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at a near three-week high of 6.3653 per dollar, 89 pips firmer than the previous fix 6.3742.

In the spot market, the onshore yuan opened at 6.3740 per dollar and was changing hands at 6.3737 at midday, 33 pips firmer than the previous late session close.

Corporates converting their dollars ahead of the long Lunar New Year holiday, which falls on Jan. 31 to Feb. 6, provided usual seasonal support for the yuan.

Otherwise the dollar remains underpinned by market expectations that the US Federal Reserve will tighten monetary policy sooner than previously expected.

Separately, investors were becoming increasingly concerned over how far China will go to smother outbreaks of Covid-19, following isolated reports of in-community transmission of the fast spreading Omicron variant of the virus.

In December, a national health official said local transmission caused by an Omicron infection arriving from overseas had been found in the southern city of Guangzhou and quickly contained, without giving local case numbers.

And over the weekend, two cases of local transmission of Omicron were reported in the port city of Tianjin.
Authorities have responded by tightening exit controls.

Residents in the city of 14 million people are now required to obtain approval from employers or community authorities before leaving town and a negative Covid-19 test within 48 hours of departure.

In China's central Henan province, the city of Anyang detected two local Omicron infections traced to a student arriving from Tianjin, and it was unclear whether any of the other Covid-19 cases in Anyang belonged to the Omicron strain.
Tianjin's proximity to Beijing added to concerns.

Tommy Xie, head of Greater China research at OCBC Bank, said in a note to client that authorities were likely to maintain their aggressive strategy to stamping out the virus ahead of the upcoming Beijing Winter Olympics.

He said the economy was likely to suffer "more short-term disruptions from more frequent lockdowns." Analysts at Maybank the fight against the pandemic may increase the need for policy support for the economy.

By midday, the global dollar index rose to 95.916 from the previous close of 95.719, while the offshore yuan was trading at 6.3784 per dollar.