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Yuan firms, interbank rates dip but liquidity still tight

Monday, January 23, 2017 - 12:23

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China's yuan strengthened on Monday morning as the US dollar slipped, while rates in the interbank market fell back but remained elevated after the central bank's move last week to ease tight liquidity.

[SHANGHAI] China's yuan strengthened on Monday morning as the US dollar slipped, while rates in the interbank market fell back but remained elevated after the central bank's move last week to ease tight liquidity.

The People's Bank of China set the yuan on a firmer course in early trade, fixing the midpoint at 6.8572 per US dollar prior to market open, 121 pips stronger than the previous fix of 6.8693.

The strength in the official yuan guidance rate was due to a broad slide in the US currency after Donald Trump's protectionist inauguration address. His first speech as president on Friday highlighted his "America first" policies, which disappointed some investors hoping for details on his plans to stoke growth and reduce taxes.

The slide in the US dollar pushed up spot yuan by more than 400 pips at one point.

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The spot market opened at 6.8570 per US dollar and was changing hands at 6.8480 at midday, 340 pips stronger than the previous late session close and 0.13 per cent firmer than the midpoint.

A gauge measuring US dollar strength against six other currencies fell to 100.36 at midday, compared with the previous close of 100.74.

However, some analysts said that China, one of the top exporters to the United States, would face pressure if the protectionist tone set in Mr Trump's speech translates into policy.

Alastair Pinder, Asian FX Strategist at HSBC, said in a note on Monday the focus on trade protectionism could put the yuan under "additional depreciation pressures".

The yuan experienced huge volatility last week as some foreign exchange traders were forced to bail out of short positions due to an unexpected spike in funding costs amid tight liquidity before the Lunar New Year holiday.

Primary money rates fell on Monday but remained elevated, after the central bank injected liquidity into the banking system on Friday.

The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was 2.4472 per cent at midday, around seven basis points lower than the previous session's closing average rate.

The central bank said in a statement on Friday it would provide funds through a temporary liquidity facility for some major commercial banks for 28 days, a new policy tool designed by the PBOC to ease seasonal cash shortages.

China's biggest holiday, the Lunar New Year, will start on Jan 27 and end on Feb 2.

The central bank drained 10 billion yuan from the money market on Monday through open market operations, but it made a weekly net injection of 1.13 trillion yuan (S$230 billion) last week, the biggest weekly injection on record, according to Reuters calculations.

Gao Qi, a Singapore-based FX strategist at Scotiabank, said he expected the central bank to tighten liquidity after the holiday.

"In the months ahead, we believe the central bank will raise interbank yuan funding costs particularly in the offshore market if necessary to curb one-way speculation over yuan depreciation," Mr Gao wrote.

The offshore yuan was trading 0.43 per cent firmer than the onshore spot at 6.8188 per US dollar at noon.

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 7.099, 3.41 per cent weaker than the midpoint.

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

REUTERS

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