Yuan remains flat as investors shrug off weaker midpoint

China’s yuan traded flat against the dollar on Monday, after the central bank set a weaker mid-point following a wild ride last week that saw the yuan strengthen around 1 per cent before falling back amid a liquidity squeeze in the offshore market.

Monday’s official mid-point, guided by the People's Bank of China, was set at 6.9262 per dollar.

The fix was 594 pips, or 0.86 per cent, weaker than the reference rate on Friday, its biggest one-day percentage drop since June.

Friday’s fix was 6.8668 per dollar. Still, Monday’s fixing was firmer than the market had expected, traders said, with forecasts around 6.9450 per dollar.

Monday’s midpoint fixing drew strong interest after the sharp movements last week, during which the offshore yuan had a record weekly rise.

“Today’s fixing was so suppressed,” said one trader at a foreign bank in Shanghai.

“There was some corporate dollar demand in the market, while some dollar sales emerged from speculative arbitrage,” the trader added, noting the widened gap between onshore and offshore spot rates let some investors purchase dollars offshore to sell for a profit onshore.

Some traders said major state-owned banks were offering dollars in morning trade, but the amount was not as huge as at the end of 2016.

State-owned banks have regularly sold dollars over the past few months in what traders believe is part of efforts to prevent the yuan from falling too rapidly after the currency tumbled to 8-1/2-year lows in November.

Last week, yuan overnight interbank rates in Hong Kong soared, pushing the offshore yuan to its strongest levels since January 2016 and creating a knock-on effect on the onshore yuan.

Interbank rates for the offshore yuan fell sharply to 14.05 per cent on Monday from Friday’s 61.33 per cent.

The falling yuan has raised concern among Chinese policymakers of capital outflows, and on Saturday the government had reported that foreign exchange reserves fell to near six-year lows by the end of December.

Reserves held just above the critical $3 trillion level, however, after authorities stepped in to support the weakening yuan ahead of US President-elect Donald Trump’s inauguration.

“The spike of (the) fixing this morning together with the fall of December FX reserves to $3.01 trillion implies that expectations on RMB depreciation may resume this week,” Tommy Xie, an economist at OCBC Bank in Singapore wrote in a note on Monday.

The spot market opened at 6.9400 per dollar and was changing hands at 6.9327 at midday, only 3 pips firmer than the previous late session close and 0.09 per cent firmer than the midpoint.

Some traders said the stronger-than-expected mid-point may have been a result of the mechanism, which eliminates some of the highest and lowest quotes from contributors.

Weakness in the yuan on Monday also reflected strength in the greenback, which was boosted by a solid US jobs report on Friday that analysts said bolsters the case for further interest rate increases from the Federal Reserve this year.

The latest China Foreign Exchange Trade System (CFETS) data showed that the index for the yuan’s value based on the market’s trade-weighted basket stood at 95.25 on Friday, the highest level since July 2016.

The December 30 level for the index, published weekly, was 94.83.

Dealers in international currencies were keeping a wary eye on the yuan after Beijing engineered a sharp tightening in liquidity last week that squeezed speculators out of short yuan/long US dollar positions.

Yet the defence of the yuan is proving expensive, as shown by the latest decline in FX reserves.

The Economic Information Daily reported that Yu Yongding, a former member of the central bank’s Monetary Policy Committee, said the pressure from outflows will persist this year and China cannot let its yuan currency depreciate more than 25 per cent against the dollar in 2017.

The yuan depreciated 6.6 per cent against the surging dollar in 2016, its biggest one-year loss since 1994, and is expected to weaken further this year if the dollar’s rally persists.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.72, firmer than the previous day’s 96.71.

The global dollar index rose to 102.31 from the previous close of 102.22.

The offshore yuan was trading 0.73 percent firmer than onshore spot at 6.8824 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 7.203, -3.84 percent away from the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

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