China's yuan flirts with fresh 5-month low after hawkish Fed official comments

China's yuan wobbled around five-month lows as it weakened again on Tuesday, with hawkish comments from a U.S. central banker propping up the dollar though traders see limited downside for the local currency from current levels.

Traders say China's weak recovery has been largely priced in, and also noted the pledge by the People's Bank of China (PBOC) to keep market stable, which should temper any large scale selling of the yuan.

The onshore yuan USDCNY was changing hands around 7.0500 at midday, 0.27% lower than the previous late session close, after the PBOC set a weaker midpoint rate USDCNY.

Barring an afternoon rebound, the yuan is on track to close at its weakest level in more than five months.

The dollar index DXY edged up overnight after St. Louis Fed President James Bullard said the Federal Reserve may still need to raise its benchmark interest rate by another half-point this year.

Bullard's hawkish remarks kept the dollar well bid, with markets expecting U.S. rates to stay higher for longer.

Yuan sentiment was not helped by geopolitical tensions, as Russia's Foreign Ministry said Group of Seven nuclear "rhetoric" has the sole aim of exerting psychological, military and political pressure on Moscow and Beijing.

Yet, overall, traders don't expect any panic selling of the yuan.

Guo Lei, economist at GF Securities, said there is no basis for sustained, rapid yuan depreciation.

"The U.S. economy cannot stand too radical rate hikes, so interest rate differentials won't give sustained support to the dollar," he wrote.

Furthermore, "China's economic slowdown has been fully priced in by the forex market."

Traders also expect the PBOC to intervene if the yuan falls too rapidly, noting its pledge over the weekend to curb speculation and calls to key participants to keep the foreign exchange market stable.

The yuan market at 4:10AM GMT:

ONSHORE SPOT:

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2% from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

*Premium for offshore spot over onshore USDCNY

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. USDCNY.