Yuan firms as state bank support offsets rising dollar demand

Reuters Shanghai | Updated on January 16, 2018 Published on December 29, 2016


China’s yuan firmed slightly against the dollar on Thursday, as dollar liquidity offered by major state-owned banks was bigger than demand by bank clients for the greenback, traders said.

The People’s Bank of China set the midpoint rate at 6.9497 per dollar prior to the market opening, slightly weaker than the previous fix of 6.9495.

The spot market opened at 6.9547 per dollar and was changing hands at that level at midday, 13 pips firmer than the previous late session close and 0.07 per cent weaker than the midpoint.

Traders said dollar purchases by bank clients - both companies and individuals - rose on Thursday morning, forcing state banks to sell dollars at around the 6.9555 level.

State-owned banks have regularly sold dollars over the past two 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 last month.

The rise in dollar demand came after China’s central bank had late on Wednesday night described as “irresponsible” a media report that the yuan had weakened beyond the 7.0000 per dollar level in the onshore market on Wednesday.

The central bank did not say which media made the report.

One trader at a Chinese bank in Shanghai said the report spurred speculation on yuan depreciation and “some people have started purchasing dollars’’.

China’s yuan is on course to finish the year with a record yearly loss of nearly 7 per cent of its value against the dollar.

Traders said the pace of depreciation this year was slightly faster than their expectations, and they predict the Chinese currency would continue to face depreciation challenges in the first quarter.

In the offshore market, the yuan weakened past 6.98 per dollar level on Thursday morning, widening the gap between the onshore and offshore yuan to around 250 pips at one point.

As of midday, the offshore yuan was trading 0.27 per cent away weaker than the onshore spot at 6.9735 per dollar.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.61, weaker than the previous day’s 96.01.

The global dollar index fell to 103.03 from the previous close of 103.3.

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 7.2955, 4.74 per cent weaker than the midpoint.

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

Published on December 29, 2016
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