China state banks seen selling US dollars to steady yuan

[SHANGHAI] China's yuan was little changed on Wednesday as heavy US dollar sales by state-owned banks, which traders suspected were on behalf of the central bank to prop up the Chinese currency, offset US dollar purchases by companies.

Prior to market open, the People's Bank of China set the midpoint rate at 6.6738 per US dollar, weaker than the previous fix of 6.6595.

The spot market opened at 6.6721 per US dollar and was changing hands at 6.6736 as of 0444 GMT, 21 pips weaker than the previous late session close and 2 pips firmer than the midpoint.

Monetary policy decisions announced by the Bank of Japan at midday did not impact the market. Traders expect the coming Federal Reserve decision and its impact on the US dollar index will affect how the yuan trades in coming days.

On Wednesday, Chinese state banks "rushed to sell US dollars to stabilise the yuan from sliding too fast today, and the yuan was abruptly pulled to a stronger side," said a trader at a foreign bank in Shanghai.

Companies' appetite for US dollars remained strong on Wednesday as they routinely make purchases to square their books by month-end and quarter-end.

"The firmness of the yuan in intraday trade was not a result of customer demand," the trader said, adding that market interest in buying dollars remained "but the yuan against dollar level was encumbered from getting softer."

Traders noted that Chinese policymakers do not like high volatility in the currency market. The yuan's official inclusion into the International Monetary Fund's Special Drawing Right (SDR) basket next month might create some uncertainties for the Chinese currency, they say.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.13, weaker than the previous day's 95.14.

The global US dollar index rose to 96.231 from the previous close of 96.019.

The offshore yuan was trading 0.09 per cent weaker than the onshore spot at 6.6797 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 6.8535, 2.62 per cent weaker than the midpoint.

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

REUTERS