China's yuan weakens after US dollar gains, sharply lower midpoint fixing

[SHANGHAI] China's yuan fell against the US dollar on Friday and was on track for its worst week since March, after the central bank fixed its official guidance sharply lower than the previous day.

Prior to the market opening on Friday, the People's Bank of China set the midpoint rate at 6.7995 per US dollar, the weakest level since June 2, reacting to strength in the greenback overnight in global markets.

On Thursday morning, shortly after the Federal Reserve raised US interest rates, the PBOC set the midpoint fixing at 6.7852 per US dollar, the strongest level in more than seven months.

In Friday trading, the onshore spot yuan opened at 6.8042 per US dollar and was changing hands at 6.8144 at midday, 44 pips weaker than the previous late session close and 0.22 per cent softer than the day's midpoint.

For the week, the yuan was down 0.26 per cent against the US dollar. If that remains the case at the end of Friday, this week will be the yuan's worst since the one that ended on March 3.

The global US dollar index, which measures its strength against six other currencies, rose to a more than two week high to 97.507 on Friday, after upbeat US economic data that could allow the Fed raise interest rates again this year.

After the Fed hiked its key policy rates a quarter percent age point as expected on Wednesday, the Chinese central bank stood pat on short-term interest rates. When the Fed raised rates in March, the PBOC did so too, within hours.

Traders said US dollar demand climbed in Friday morning trade as the bank clients worried that the yuan could weaken further. June is a traditional peak period for corporate dollar demand, they said.

One trader at a Chinese bank in Shanghai said some market participants may start to liquidate and sell dollars to lock in profits if the spot rate continued to ease and moved close to 6.85 per US dollar.

Market watchers, noting that China's foreign exchange reserves had booked four straight months of expansion, said they would like to have a better picture of capital flows judging from commercial banks' forex sales and purchases data.

The foreign exchange regulator is due to release the May data later on Friday.

Separately, a Reuters poll of 16 analysts, traders and fund managers showed that investors raised their Chinese yuan bullish bets from two weeks ago to the largest since late 2014, after Chinese authorities began tightening control of the currency in recent weeks to guard against outflow risk.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.28, firmer than the previous day's 94.25.

The offshore yuan was trading 0.12 per cent weaker than the onshore spot, at 6.8229 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 6.9995, or 2.86 per cent away from the midpoint.

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

REUTERS