China's yuan firms as US dollar broadly weaker

[SHANGHAI] China's yuan steadied for a second straight day on Tuesday to trade slightly firmer against the US dollar by midday, after a rollercoaster ride last week.

The People's Bank of China set the midpoint rate at 6.9234 per US dollar prior to market opening, firmer than the previous fix 6.9262.

The spot market opened at 6.9280 per US dollar and was changing hands at 6.9240 at midday, 90 pips firmer than the previous late session close and 0.01 per cent softer than the midpoint.

Dealers said major state-owned banks were barely offering dollar liquidity on Tuesday morning, instead, US dollar sales by traders have strengthened the spot yuan.

They said traders were selling US dollars for yuan, as the US currency lost some of the strength seen last week against the euro and the global dollar index fell to 101.58 from the previous close of 101.93.

"The dominant power in the onshore market was traders today. They sold dollars after a rise in the euro," said a Shanghai-based dealer at a Chinese bank.

State-owned banks have regularly sold US dollars over the past few months in what traders see as an effort to keep the yuan, which hit an 8-1/2-year low in November, from falling too rapidly.

Traders said still expected the yuan to fall over the year.

"7-per-dollar level would become the next important threshold, once it is breached soon after the Lunar New Year holiday, the depreciation expectation will be easily reignited again," said a trader at a Chinese bank in Shanghai.

The week-long Lunar New Year holiday will start at the end of this month.

The spread between onshore and offshore was still wide at around 500 pips on Tuesday morning. The offshore yuan was trading 0.71 per cent firmer than the onshore spot at 6.875 per US dollar at midday.

Yuan overnight interbank rates soared in Hong Kong last week, pushing the offshore yuan to its strongest levels since Jan 2016 and creating a knock-on effect on the onshore yuan.

Interbank rates for the offshore yuan fell sharply to 6.82 per cent on Tuesday, from 14.05 per cent a day earlier. The borrowing cost had surged to a high of 61.33 per cent on Friday.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.28, weaker than the previous day's 96.76.

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 7.189, 3.69 per cent weaker than the midpoint.

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

REUTERS