China's yuan slips as US dollar gathers pace ahead of Fed meeting

[HONG KONG] China's yuan slipped on Monday, as the US dollar gained momentum ahead of the US Federal Reserve's meeting this week that was expected to deliver an interest rate hike.

The People's Bank of China set the midpoint rate at 6.9086 per US dollar prior to market open, weaker than the previous fix 6.8972.

The spot market opened at 6.9092 per US dollar and was changing hands at 6.9147 at midday, 91 pips weaker than the previous late session close and 0.09 per cent softer 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.

"The yuan faces depreciation pressure as the US dollar strengthened ahead of the expected rate hike this week," said a trader at a big Chinese bank in Beijing.

"But there's support for the yuan around the 6.9150 area as state-owned banks are offering US dollars to avoid the yuan falling too quickly," the trader said.

The US central bank is widely expected to raise interest rates for the first time in 2016 at a two-day meeting that begins on Tuesday, even as investors wait to see if policymakers take a more cautious tone on the economy.

The dollar index, which tracks the greenback against a basket of six major rivals, rose to 101.78 on Monday.

Standard Chartered analysts expect the Fed to deliver a 25-basis-point rate hike on Dec 14 and another rate hike in 2017.

"The path could be steeper in 2018 with four rate hikes as more hawkish Board members likely land on the FOMC and as Chair (Janet) Yellen could step down in early 2018," they said in a report released on Monday.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.22, firmer than the previous day's 95.12.

The global US dollar index fell to 101.46 from the previous close of 101.59.

The offshore yuan was trading 0.20 per cent weaker than the onshore spot at 6.9285 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 7.1835, 3.83 per cent weaker than the midpoint.

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

REUTERS