[HONG KONG] China's yuan edged lower on Wednesday as stocks fell over 2 per cent in opening trades, though a broadly flat yuan fixing checked sharp losses for the currency.
Stocks plunged more than 6 per cent on Tuesday, their biggest fall in three weeks, on speculation the central bank may be in no rush to ease policy further and amid concerns a further weakening in the yuan would hit importers.
Traders in China's currency markets have been wary of sharp swings in daily fixing rates after the central bank's surprise devaluation of its currency by nearly 2 per cent on Aug 11.
"We are in for a period of greater market volatility than ever before but a sustained devaluation is unlikely because that would deter foreign investors from investing in China's equity markets," said Benjamin Pedley, head of investment strategy - Asia at HSBC Private Bank in Hong Kong.
The People's Bank of China set the midpoint rate at 6.3963 per dollar prior to Wednesday's market open, a shade weaker than Tuesday's closing quote of 6.3938.
The spot market opened at 6.3949 per dollar and was changing hands at 6.3984 in early deals, slightly weaker than Tuesday's close of 6.3938 per dollar.
While spot yuan is currently allowed to trade in a 2 per cent range around the daily fixing, last week's devaluation has caused onshore spot to trade on the weaker side of the fixing until state-owned banks stepped in to restore some calm.
In the derivative markets, implied currency volatility in offshore yuan has declined from record highs hit last week, though it remains at elevated levels as traders have begun to price in greater expected price swings in the yuan.
The basis spread between the offshore and onshore yuan has tightened after last week's blowout, a sign of reduced market stress.
Still, analysts expect the yuan to remain under pressure in the coming days especially with a likely rate increase from the US Federal Reserve looming on the horizon.
"Historically whenever the Fed has started raising rates, emerging market currencies haven't done well," HSBC's Pedley said.
Morgan Stanley expects the yuan to weaken to 6.91 by end-2016 while Goldman Sachs expect the yuan to slip to 6.7 over the same time period.