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China's yuan firms, seen stable ahead of SDR inclusion

Thursday, September 29, 2016 - 13:03
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China's yuan firmed slightly on Thursday, as corporate demand for US dollars was offset by ample liquidity from state banks in the lead up to next week's long national day holiday.

[SHANGHAI] China's yuan firmed slightly on Thursday, as corporate demand for US dollars was offset by ample liquidity from state banks in the lead up to next week's long national day holiday.

Traders say policymakers are telegraphing to foreign exchange markets they aim for currency stability, when the yuan is about to officially enter the International Monetary Fund's reserve basket, known as Special Drawing Rights (SDR) on Oct 1.

China's financial markets are shut for the National Day holiday from Oct 1 to Oct 7.

The People's Bank of China set the midpoint rate at 6.6700 per US dollar prior to market open, weaker than the previous fix 6.6681.

The spot market opened at 6.6724 per US dollar and was changing hands at 6.6699 at midday, 51 pips firmer than the previous late session close and nearly unchanged from the midpoint.

"The major market participants today are companies, their appetite for US dollars remains strong," said a trader at a foreign bank in Shanghai.

Companies usually purchase the greenback at the month-end and quarter-end to square their books.

"In the meantime, state banks were offering US dollars at around 6.67 level to support the yuan. The policymaker will not want to see the yuan trading far from the guidance rate when it's about to enter the SDR basket."

Traders suspected that state-owned banks were selling US dollars on behalf of the central bank to keep the yuan from sliding too fast, while some believed big banks were trading on their own behalf.

Some analysts said the central bank may loosen its grip on the yuan after the holiday.

"But we believe the room for CNY (onshore yuan) depreciation will remain modest and maintain our end-2016 forecast at 6.70," Christy Tan, head of markets strategy/research Asia at National Australia Bank wrote in a note on Wednesday.

The global dollar index fell to 95.39 from the previous close of 95.431.

The offshore yuan was trading 0.17 per cent weaker than the onshore spot at 6.6812 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 6.831, 2.36 per cent softer than the midpoint.

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

REUTERS

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