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China's yuan set for best week since July on state bank buying, drooping US dollar

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China's yuan firmed against the US dollar on Friday and looked set for its biggest weekly gain in more than four months, thanks to continued support from state-owned banks and a retreat in the US dollar, traders said.

[SHANGHAI] China's yuan firmed against the US dollar on Friday and looked set for its biggest weekly gain in more than four months, thanks to continued support from state-owned banks and a retreat in the US dollar, traders said.

Major state-owned banks sold US dollars in the market for a fifth straight trading day, traders said, offsetting US dollar purchases by companies on Friday.

"The dollar's retreat overseas offered a chance for the yuan to firm slightly, but the overall trend for the yuan to depreciate has not been changed," said a trader at a Chinese bank in Shanghai.

In the spot market, the yuan opened at 6.8830 per US dollar and was trading at 6.8835 at midday, 30 pips firmer than the previous late session close and 0.06 per cent weaker from the midpoint.

The People's Bank of China fixed the midpoint rate at 6.8794 per US dollar on Friday, the strongest level in nearly two weeks and firmer than the previous fix of 6.8958.

Despite firming in recent sessions, the yuan has still lost nearly 6 per cent of its value against the US dollar so far this year, reviving worries about a surge in capital outflows even as the economy is showing signs of stabilising.

Market watchers predict it to recoil further next year, with US dollar strength expected to persist on hopes that President-elect Donald Trump will be able to shift the US economy into higher gear.

A Reuters poll of more than 50 foreign exchange analysts this week suggested that the yuan would likely trade at 6.90 per US dollar by the end of this month, and then depreciate steadily to 7.14 in a year, which would mark its lowest level in nearly a decade.

"We have nudged our forecasts, and now think it will breach 7 sooner rather than later, and end next year close to 7.3," Capital Economics said in a note on Friday.

"But we do not expect a repeat of the renminbi 'crisis' that sent shockwaves through other emerging markets a year ago. We do expect (economic) growth to slow next year, but a hard landing - fears of which were behind the sell-off last year - remains unlikely."

The global US dollar index edged down to 100.77 around midday from the previous close of 101.04, as investors consolidated gains ahead of the US jobs report later in the day.

The Shanghai trader also noted that some participants in the market were holding long yuan positions to hedge against potential risks from any unexpected results from Italy's constitutional referendum on Sunday.

"At least they won't lose money if Italy becomes the new black swan for financial markets," the trader added.

In the offshore market, the yuan has mostly trading at a discount to onshore spot, but was at a firmer level at one point overnight and in early trade on Friday, partly due to liquidity tightness in Hong Kong after China tightened controls on some cross-border yuan outflows, some traders said.

The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), set by the Treasury Markets Association, rose to 7.159 per cent for overnight contracts on Friday, the highest in two months. It was 4.81833 per cent on Thursday.

The offshore yuan was trading just 15 pips softer than the onshore spot at 6.8850 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 7.086, 2.92 per cent weaker than the midpoint.

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

REUTERS