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China's yuan weakens, but depreciation expectations ebb

Thursday, September 8, 2016 - 12:16
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China's yuan weakened on Thursday, with traders expecting the Chinese currency to trade sideways, saying views about further yuan depreciation for the near term had lessened.

[SHANGHAI] China's yuan weakened on Thursday, with traders expecting the Chinese currency to trade sideways, saying views about further yuan depreciation for the near term had lessened.

Both Chinese and foreign banks were purchasing US dollars in the morning session, taking a "buy low, sell high" strategy to make quick profits, traders said.

The People's Bank of China set the midpoint rate at 6.6620 per US dollar prior to market open, weaker than the previous fix of 6.6555.

The spot market opened at 6.6663 per US dollar and was changing hands at 6.6664 at midday, 54 pips weaker than the previous late session close and 0.07 per cent weaker than the midpoint.

"There is no strong expectation about the yuan depreciation at the current level, which has not triggered much intervention from the central bank this morning," said a Shanghai-based trader at a foreign bank.

"But when the yuan dips below 6.68 per dollar, investors will settle their bets," he added, pointing out that investors have a consensus that the central bank may intervene in the market to stabilise the yuan when it breaches the watershed level and heads to the psychologically important 6.7 level.

Some traders said current sideways trading in the yuan was very similar to the situation ahead of China's sharp one-off devaluation last August, but they said they did not expect another one-off move.

The yuan is expected to weaken more than previously thought in a year from now, as a slowdown in growth in Asia and rising chances of US rate increases boost the US dollar, a Reuters poll found this month.

The yuan is expected to slip to 6.80 per US dollar by the end of February, and eventually to 6.89 a year from now.

Traders said the market had not reacted much to China's better-than-expected trade data on Thursday or foreign exchange figures on Wednesday.

China's imports unexpectedly rose in August for the first time in nearly two years while exports fell at a more modest pace. Foreign exchange reserves fell by a "modest" US$15.89 billion to US$3.185 trillion in August.

Traders believe the central bank has stepped in via state-run banks since mid-July to slow the pace of depreciation in the yuan, which has weakened 2.6 per cent against the US dollar so far this year.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.44, firmer than the previous day's 94.43.

The global US dollar index fell to 94.871 from the previous close of 94.956.

The offshore yuan was trading 0.11 per cent weaker than the onshore spot at 6.674 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 6.827, 2.42 per cent weaker than the midpoint.

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

REUTERS