China's yuan falls, interbank borrowing costs remain elevated

[HONG KONG] China's yuan weakened against the US dollar on Tuesday after the greenback clawed back from multi-month lows, while borrowing costs in the interbank market remained elevated as liquidity tightened heading into the end of quarter.

The People's Bank of China set the midpoint rate at 6.8782 per US dollar prior to the market open, weaker than the previous fix of 6.8701.

In the spot market, the yuan opened at 6.8785 per US dollar and was changing hands at 6.8836 at midday, 69 pips weaker than the previous late session close and 0.08 per cent weaker than the midpoint.

The US dollar remained on shaky ground against its major peers amid concerns over whether US President Donald Trump will be able to pass tax cuts and fiscal spending bills after his failure to rally enough support from his own party for healthcare reforms.

"For the week ahead, there are plenty of Fed's members scheduled to deliver speeches... as market expects that the next (US) rate hike will only probably come in June, Fed members'speeches should be less indicative and Trump's policy delivery will remain in the spotlight," said Ken Cheung, Asian FX Strategist at Mizuho Bank.

Analysts also expect more tightening from China's central bank this year, though at a far more gradual and modest pace, as policymakers try to contain financial risks and encourage deleveraging after years of debt-fuelled stimulus.

The PBOC earlier this month raised money market and other short- and medium-term interest rates, following similar moves earlier this year and hours after the Fed hiked its benchmark policy rate.

"We look for more rate hikes from the PBOC in the rest of this year but only at gradual pace. This should widen the China government bond-US treasury yield differential and help defend the CNH," said Mizuho's Mr Cheung.

The offshore yuan was trading 0.28 per cent stronger than the onshore spot at 6.8642 per US dollar.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.01, weaker than the previous day's 94.1.

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 7.052, 2.46 per cent weaker than the midpoint.

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

In the interbank market, the Shanghai Interbank Offered Rate (SHIBOR) for the seven-day tenor was 2.7910 per cent on Tuesday, around its highest level since mid-2015.

Adding to the usual concerns about tighter liquidity heading into the month- and quarter-end, some lenders are believed to be hoarding cash ahead of the central bank's quarterly assessment of the health of commercial banks.

The macro-prudential assessment, or MPA, will include off-balance sheet wealth management products (WMPs) for the first time, to give authorities a better sense of the risks in the financial system.

REUTERS