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China's yuan eases on USD bounce, but set for 3rd weekly gain

Friday, July 28, 2017 - 17:26

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China's yuan edged down on Friday after the central bank fixed a weaker mid-point and the dollar eased off multi-month lows, but it will likely stay under pressure on corporate US dollar demand.

[SHANGHAI] China's yuan edged down on Friday after the central bank fixed a weaker mid-point and the dollar eased off multi-month lows, but it will likely stay under pressure on corporate US dollar demand.

Before the market opened, the People's Bank of China set the midpoint rate at 6.7373 per US dollar, weaker than the previous fix of 6.7307, which was its strongest in nine months and its biggest one-day rise in percentage terms since June 28.

Thursday's fix reflected the dollar's descent to a 13-month low after the Federal Reserve's meeting earlier this week, where the US central bank's tone was perceived as dovish.

The spot market opened at 6.7440 per US dollar and was changing hands at 6.7429 at local close, 20 pips weaker than the previous late session close and 0.08 per cent softer than the midpoint.

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China takes the official market closing price at 0830 GMT into consideration when it fixes the official guidance rate, while an evening session lasts until 1530 GMT.

The spot rate is currently allowed to trade within a range two per cent above or below the official fixing on any given day.

If the yuan finishes the late night session at the current level, it will have strengthened around 0.34 per cent against the US dollar for the week, the third straight winning week.

Traders in the past week have noted that market expectations for a strong US dollar have waned in the wake of a more dovish-sounding Fed. The central bank said it expected to start winding down its bond portfolio "relatively soon" but would carefully monitor price trends.

However, a Shanghai-based trader with a Chinese bank said the market remained balanced on Friday on both corporate US dollar purchases and sales.

While companies which stocked up on US dollars when the depreciation expectation on the yuan was strong are liquidating their positions to cap losses, many companies are also taking advantage of the cheaper US dollar to pay dividends to offshore shareholders.

But traders see corporate dollar purchases stretching into the beginning of August as Hong-Kong listed mainland companies buy dollars to pay dividends to their overseas shareholders.

Ji Tianhe, China rates and FX strategist at BNP Paribas, said domestic demand for the foreign currency remained strong on the weak US dollar, which made the Chinese currency "vulnerable" to any upward correction in the US unit.

"Net forex sales continued to widen in the spot market... showing that bargain hunting for a cheap dollar is a common operation," Mr Ji said.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.84, firmer than the previous day's 93.73.

The global dollar index fell to 93.76 from the previous close of 93.864.

The offshore yuan was trading 0.01 per cent weaker than the onshore spot at 6.7435 per US dollar as of 0830 GMT.

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 6.8755, 2.01 per cent weaker than the midpoint.

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

REUTERS

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