China's yuan falls past 6.9 per US dollar after weaker midpoint fixing

[SHANGHAI] China's yuan slipped past the key 6.9 per US dollar level on Tuesday, after the central bank guided its official yuan midpoint to its weakest since mid-January.

The People's Bank of China fixed the yuan midpoint rate at 6.8957 per US dollar prior to market open, its weakest since Jan 17.

Tuesday's fixing was 167 pips or 0.2 per cent softer than the previous fix, which was set at 6.8790.

In the spot market, the yuan breached the psychologically important 6.9 per US dollar level in early trade and was changing hands at 6.9037 by 0258 GMT, 76 pips weaker than the previous late session close and 0.12 per cent softer than the midpoint.

Traders said the midpoint matched what their models had suggested, and noted that companies were not so willing to purchase US dollars in morning trade.

"Market participants were very cautious with some suspecting dollar liquidity offered by state-owned banks would soon appear. But big state banks did not emerge," said a Shanghai-based trader at a Chinese bank.

State-owned banks offered US dollars regularly late last year in what traders believe was part of efforts to support the Chinese yuan from falling too fast.

A deputy governor of the central bank said on Monday that China would stick to its managed floating exchange rate framework to keep the yuan currency basically stable, following a subtle change in the language used to describe the yuan in Premier Li Keqiang's annual work report delivered on Sunday.

The slight change in the wording had sparked some speculation that policymakers were now less willing to defend the Chinese currency.

"We believe that China has softened its view on defending the RMB exchange rate and has shifted its focus to defending the RMB international status," said Ken Cheung, Asian FX strategist at Mizuho Bank in Hong Kong.

"That says, the policy makers are unlikely to intervene in the FX market directly and will allow more flexibility in the RMB exchange rate," he added.

Multiple traders said they did not think the wording in the work paper would have any direct impact on the domestic forex market.

The latest Reuters poll of more than 60 foreign exchange analysts forecast that the yuan is likely to weaken to 7.03 by the end of August, and eventually to 7.12 by this time next year, despite the Chinese unit gaining around 0.6 per cent to the US dollar so far this year.

China is set to release February foreign exchange reserves data later on Tuesday.

Economists polled by Reuters had expected the forex reserves to drop by US$25 billion to US$2.973 trillion last month.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.11, weaker than the previous day's 95.17.

The global US dollar index stayed flat at 101.64 from the previous close of 101.64.

The offshore yuan was trading 0.05 per cent firmer than the onshore spot at 6.9001 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 7.123, 3.19 per cent weaker than the midpoint.

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

REUTERS