China's yuan slips, central bank seen controlling pace of depreciation

[SHANGHAI] The yuan inched lower against the dollar on Monday, but further weakness was capped as the central bank was suspected of intervention to offset massive dollar demand from banks' clients, traders said.

"The rates in the morning were really flat," said a trader at a Chinese commercial bank in Shanghai.

"State banks were offering dollars from 6.6870 to 6.6872. Only 2 pips apart." "I suspect that the central bank is not even willing to let the yuan slide to 6.69 at least for now, not to mention 6.7." State banks typically intervene in China's forex market on behalf of the central bank, offering dollar liquidity to shore up the yuan when the Chinese currency faces downward pressure.

Spot yuan opened at 6.6889 per dollar and was changing hands at 6.6870 at midday, easing 0.06 per cent from the previous close. The rates barely moved since 9:45 am (0130 GMT).

The yuan has now lost close to 3 per cent against the dollar so far this year and is hovering around 5-1/2 year lows, while it has lost more than 6 per cent against a trade-weighted basket.

The People's Bank of China set the midpoint rate at 6.6843 per dollar prior to the market open, only 0.01 per cent firmer than the previous fix 6.6853.

The PBOC has guided the official guidance rate within a tight range of less than 0.1 per cent change in the past three sessions after Beijing pledged to allow greater two-way volatility in the currency this year.

Traders also noticed that the direction of the fixing was not in line with market expectations. The market expected the midpoint to weaken slightly but the central bank strengthened it instead on Monday.

"This is really confusing," said a trader at another Chinese commercial bank in Shanghai.

Traders said the PBOC might let the yuan slide further if faced with a surging dollar.

The latest China Foreign Exchange Trade System (CFETS) data showed that the index for the yuan's value based on the market's trade-weighted basket stood at 94.25 last week, the lowest on record and down 6.6 per cent for the year.

The index was first published by CFETS in December 2015, setting the yuan's value at 100 at the end of 2014.

The offshore yuan was trading 0.18 per cent softer than the onshore spot at 6.6993 per dollar.

China will release June trade data on Wednesday and June activity indicators on Friday, along with second-quarter GDP.

REUTERS