Yuan eases after China’s central bank seen managing decline

China's yuan softened on Friday after official data suggested that the People's Bank of China spent more to prop up the currency last month, highlighting the bank's challenges in an environment of unabating U.S. dollar strength.

The PBOC sold a net 91.6 billion yuan worth of foreign exchange in October, according to official data released on Thursday. It was the second-largest monthly sale of foreign exchange in 2018, after September.

The data “implies the central bank might have spent money in the market to stop or slow down the depreciation by selling dollars,” Iris Pang, an economist at ING in Hong Kong, wrote in a note on Thursday evening.

The PBOC's goal is not to stop the yuan from weakening, but to ensure that the depreciation “doesn't surprise the market,” said Pang. She sees the yuan weakening past the 7-per-dollar psychological barrier by the end of 2018.

The Chinese currency has lost over 6 per cent against the greenback so far this year.

But Xie Yaxuan, an economist at China Merchants Securities, believes the data paints a more bullish picture for the yuan, showcasing the PBOC's ability to keep the currency stable.

“The goal of stabilising the exchange rate can be achieved via various means, such as direct intervention and the counter-cyclical factor,” he wrote in a note on Thursday, referring to the mechanism reintroduced in August, which gave the PBOC more control over the exchange rate.

The reality likely lies somewhere between these two views, said a Shanghai-based trader, who works for an international bank.

“The PBOC has the strength to defend the 7-per-dollar level, but the fact that they have do this at all shows that the depreciation pressure is still there,” he said.

“In the short run, we expect the yuan to be weaker, but it won't test the red line.”

The spot yuan was changing hands at 6.9395 per dollar at midday, 81 pips weaker than the previous late session close and 0.13 percent weaker than the midpoint, after opening at 6.9325.

Prior to the open, the PBOC set the daily midpoint rate at 6.9306 per dollar, firmer than the previous fix 6.9391.

As monetary policies diverge between U.S. and China, Europe and Japan, the dollar could firm up further, wrote Philip Wee, Singapore-based FX strategist at DBS, in a memo on Friday.

With the U.S. central bank tightening but Europe and Japan staying loose, the dollar index has the potential to shoot above 100 points in 2019, Wee said.

“The divergence story will also drive the Chinese yuan weaker past the 7 level,” said Wee, who expects further cuts to reserve requirements for Chinese banks of between 150 and 300 basis points next year.

The global dollar index fell to 96.437 from the previous close of 96.712.

The risk of an extension, or escalation, in the U.S.-China trade war, continued to limit the market's appetite to buy the yuan on Friday.

Trade tensions stayed hot ahead of next week's G20 summit, where the Chinese and U.S. presidents will meet. On Thursday, Beijing hit back at Washington's accusations of unfair trade practices, saying the claims are “groundless” and ”unacceptable”.

The offshore yuan was trading 0.11 per cent stronger than the onshore spot at 6.9318 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 92.91, down from Thursday's 93.03.

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