China's yuan falls to over 8-year low on US dollar strength

[HONG KONG] China's yuan fell to its weakest level in more than eight years against a broadly stronger US dollar on Thursday after the Federal Reserve raised interest rates and also projected more interest rate increases than earlier expected.

Traders say China's central bank set a much stronger yuan midpoint than expected to counter market expectations for a faster depreciation, and big state-owned banks also supported the yuan by offering US dollars.

The People's Bank of China set the midpoint rate at 6.9289 yuan per US dollar prior to market open, weaker than the previous fix 6.9028.

The spot market opened at 6.9350 yuan per US dollar and traded at 6.9339 at midday, 269 pips weaker than the previous late session close and 0.07 per cent weaker than the midpoint.

The spot rate is currently allowed to trade with a range 2 per cent above or below the official fixing on any given day.

"Demand to buy US dollars is quite strong today, but big Chinese banks are offering large amount of US dollars around 6.9340 area to avoid the yuan from falling too much," said a trader at a Chinese bank in Shanghai.

In a closely watched decision on late Wednesday, the US central bank raised the target federal funds rate by 25 basis points to between 0.50 per cent and 0.75 per cent, but it was Federal Open Market Committee members for a median of three more hikes next year, up from two previously, that drove the US dollar higher.

The US dollar index rose to 102.350 late on Wednesday, its highest since January 2003.

Onshore yuan yields have risen recently, driven by PBOC attempts to reduce leverage and off-balance sheet funding, market worries about capital and speculation the authorities are keeping funding conditions tight in order to discourage speculative positions against the yuan.

The tightening measures has has significant results so far. The yuan's depreciation trend has stalled and the offshore yuan is now trading stronger than its onshore counterpart, indicating that speculative long US dollar positions offshore were being unwound.

The offshore yuan was trading 0.01 per cent weaker than the onshore spot at 6.9345 per US dollar.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.68, firmer than the previous day's 95.07.

Ngan Kim Man, deputy head of treasury at China Everbright Bank's Hong Kong branch, said tight liquidity in the offshore yuan market was normal at the year-end, but Beijing's recent measures to control capital outflows had made it even more expensive to short the yuan.

The interbank borrowing rate in the offshore yuan market has been elevated in the past few weeks. The overnight borrowing rate was fixed at 11.76 per cent on Thursday, much higher than 7.32233 per cent on Wednesday.

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 7.231, 4.18 per cent weaker than the midpoint.

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

The benchmark stock index is down 4.8 per cent since Nov 29.

REUTERS