China's yuan weakens on PBOC guidance after new round of European QE

[SHANGHAI] China's yuan weakened on Friday after the central bank fixed its midpoint 0.2 per cent weaker, the biggest single-day weakening in 10 months, in response to the fresh round of quantitative easing (QE) announced by the European Central Bank overnight.

The People's Bank of China (PBOC) set the midpoint rate at 6.1342 per dollar prior to market open, weaker than the previous fix of 6.1247.

The ECB's QE programme - printing money to buy euro zone government bonds - along with its existing schemes will pump 60 billion euros a month into the euro zone economy. It is set to run from March until September next year.

With the PBOC's tolerance, the yuan has already been on a slight but steady downward trend since December, pressured the dollar's strength in global markets and broad weakening of currencies in emerging markets.

"While the PBOC had been tolerating the yuan's weakening for the past couple of months, strong QE steps recently taken by other global central banks may push it to proactively guide the currency weaker," said a senior trader at a Chinese commercial bank in Shanghai.

"Friday's midpoint could be the first sign of such a policy move by the PBOC, although more time is needed to watch if the Chinese central bank will establish such a proactive policy trend." The spot market opened at 6.2180 per dollar and was changing hands at 6.2173 in early trade, 78 pips away from the previous close and 1.35 per cent away from 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 offshore yuan was trading 0.08 per cent weaker from the onshore spot at 6.2223 per 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 6.323, 3 per cent away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 per cent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.

REUTERS