China's yuan edges up, but set for 1.5% monthly loss vs US dollar

[SHANGHAI] China's yuan firmed on Monday after the central bank set the daily midpoint fixing at the strongest pace in more than a month, but the Chinese currency is still poised for a nearly 1.5 per cent loss against the US dollar this month.

The People's Bank of China set the midpoint rate at 6.7641 per US dollar prior to market open, compared with the previous fix 6.7858. The central bank set the midpoint 0.32 per cent firmer, by the most since Sept 22.

The US dollar has stumbled against a basket of major currencies in global markets since late Friday, which has underpinned the yuan.

The US dollar index against a basket of six major currencies stood at 98.432, edging down from last Tuesday's near nine-month high of 99.119.

Spot yuan opened at 6.7702 per US dollar and was changing hands at 6.7698 by midday, 112 pips firmer than the previous late session close and 0.08 per cent weaker than the midpoint.

"The market has reached a short-term equilibrium at current levels, with slow corporate dollar purchases," said a trader at a Chinese bank in Shanghai.

He added that some market participants may sell their long positions in the US dollar to square their books at the end of the month, which also helps to shore up the Chinese currency.

Traders said, however, that corporates will show more willingness to purchase US dollars if the yuan firms further.

The US dollar's movements in global markets may continue to influence the Chinese currency amid uncertainties from the upcoming US presidential election, traders said, as the prospect of an interest rate hike by the US Federal Reserve later this year may already be priced in.

US dollar strength has already forced the Chinese yuan to lose about 1.5 per cent against the greenback so far this month. 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 94.15 on Friday, down 0.16 per cent from the previous week.

Credit Suisse wrote in a note on Monday that it expected the Chinese government would allow onshore yuan to "fall 1-1.5 per cent against its basket over the next several months".

"We think pressure for trend depreciation is coming from persistent capital outflows which the government will likely allow the currency to adjust given still low inflation and lackluster export growth," it added.

The offshore yuan was trading 0.15 per cent softer than the onshore spot at 6.7798 per US 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 6.9437, 2.59 per cent weaker than the midpoint.

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

REUTERS