China's yuan down, state banks step in to temper fall

[SHANGHAI] Chinese state banks jumped in to stem yuan weakness on Friday morning after the US dollar rose broadly, but the currency remained vulnerable in the face of a relentlessly rising greenback amid expectations of higher US interest rates.

The yuan touched 6.9000 per US dollar in early trade after the People's Bank of China lowered its midpoint the most in seven weeks to reflect a stronger US dollar.

A flood of US dollar liquidity stopped it in its tracks, however.

"Big state banks started to offer US dollar liquidity to support the yuan right after two transactions dragged the spot rate down to 6.9 per US dollar," said the trader at a foreign bank in Shanghai.

The trader said demand for US dollars by companies remained strong on Friday morning. An overnight decision by the European Central Bank to extend its bond-buying programme and expand purchases of short-end debt buoyed the US dollar against the euro.

The PBOC set its official yuan midpoint at 6.8972 per US dollar prior to the market open on Friday, 241 pips or 0.35 per cent weaker compared with the day earlier, marking its biggest percentage loss since October 21. The previous fix was at 6.8731.

The spot market opened at 6.8985 per US dollar and was changing hands at 6.8995 at midday, hitting a low of 6.9000 before state banks stepped in to support. It was 170 pips weaker than previous late session close and 0.03 per cent softer than the midpoint.

Despite the day's fall, the yuan was set to firm slightly against the US dollar for the week.

Investors' focus turned to next week's Federal Reserve policy meeting where it is widely expected to raise short-term interest rates by a quarter point.

Analysts expect the US dollar's overall bullish tone and expectations of reflationary policies under the incoming US administration of Donald Trump to keep the yuan under pressure.

The yuan had managed to stem its slide since hitting an 8-1/2-year low last month as China rolled out several measures to temper a rush of capital and keep a lid on speculators betting on further weakness.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.27, firmer than the previous day's 95.06.

The US dollar index rose to 101.17 from the previous close of 101.1.

The offshore yuan was trading 0.26 per cent weaker than the onshore spot at 6.9174 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 7.1505, 3.54 per cent weaker than the midpoint.

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

REUTERS