China yuan down, depreciation fears persist even as Trump sets to improve China-US ties

[SHANGHAI] China's yuan weakened against the US dollar on Friday, with news the Mr Trump administration is stepping up efforts to improve US-China relations setting up a period of possible fresh catalysts for the currency market.

US President Donald Trump agreed to honour the United States' "One China" policy during a phone call with Chinese President Xi Jinping, the White House said late on Thursday.

Washington's acknowledgement of China's position that it has sovereignty over self-ruled Taiwan comes amid increasing tensions between the two nations, with Mr Trump's campaign threats to label China a currency manipulator keeping global markets on edge.

On Friday, however, the yuan trades were relatively subdued, and there was no notable impact on the markets from upbeat Chinese trade data either, traders said.

"I don't think the trade data will change the market view about the yuan which is likely to remain on a weakening bias this year," said Raymond Yeung, Greater China Chief Economist at ANZ Bank in Hong Kong.

The People's Bank of China set the midpoint rate at 6.8819 per US dollar prior to market open, weaker than the previous fix at 6.871.

The spot market opened at 6.8789 per US dollar and was changing hands at 6.8777 at midday, 102 pips weaker than the previous late session close but 0.06 per cent firmer than the midpoint.

For the week, the spot yuan is heading for its worst week since mid-December, losing more than 0.06 per cent against the US dollar.

It fell 6.6 per cent last year for its biggest drop since 1994, pressured by a surge of capital outflows on expectations Mr Trump's polices will prompt a higher pace of US rate increases. Markets expect the yuan to fall further this year.

"Traders are still waiting for a clear picture of either the yuan or the US dollar movement in the near term," a trader added.

The spread between onshore and offshore spot rates widened again on Friday to more than 100 pips, but the gap was smaller compared with earlier this week. It widened a 723-pip gap at the beginning of this month.

A stronger offshore yuan is containing the falls in its onshore counterpart although the longer term trend suggests that the offshore counterpart will trade at a discount to onshore spot.

The offshore yuan was trading 0.18 per cent firmer than the onshore spot at 6.865 per US dollar.

A Reuters poll of more than 50 foreign exchange strategists this week suggested that China's currency is expected to fall to a near decade-low to 7.18 per US dollar in the year ahead, as authorities struggle to stem capital outflows and despite the central bank's surprise short-term interest rate hikes.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.26, firmer than the previous day's 95.18.

The global dollar index rose to 100.66 from the previous close of 100.65.

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 7.115, 3.28 per cent weaker than the midpoint.

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

REUTERS