[SHANGHAI] China's yuan weakened slightly against the dollar on Monday after China published surprisingly weak January trade data on Sunday, and continued to trade near the limit of its daily trading band as the central bank held the exchange rate steady.
The People's Bank of China set the midpoint rate at 6.1311 per dollar prior to market open, weaker than the previous fix 6.1261, after the dollar gained in overnight trade.
The spot market opened at 6.2495 per dollar and was changing hands at 6.2492 at midday, 45 pips weaker than the previous close and 1.93 percent 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 China customs bureau reported that year-on-year exports and imports were down 3.3 and 19.9 per cent respectively, both missing analyst expectations by a wide margin.
Weakness in exports has fuelled speculation that China's central bank might seek to guide the yuan lower.
Aside from a brief recovery in December, China's export growth has been slowing since September, and Friday's figure was the worst in nine months.
Nonetheless traders were sanguine about the possibility of a major move down in the yuan's midpoint before the Lunar New Year.
"The import data was quite bad, and the pressure for the CNY to depreciate is a little greater now," said a currency trader at ING Bank in Shanghai.
"But the PBOC will likely wait for some time and see how the market goes after the RRR cut before making any other moves." On Wednesday the People's bank of China cut the required reserve ratio (RRR) for Chinese banks by 50 basis points, freeing up an estimated 600 billion yuan (US$96 billion) for lending.
The offshore yuan was trading -0.04 per cent away from the onshore spot rate at 6.2515 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 6.3745, 3.82 per cent weaker than 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.
As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.