China's yuan firms as state banks sell retreating US dollar

[HONG KONG] China's yuan on Tuesday firmed against the US dollar, which state-owned banks sold to support the Chinese currency, while the US dollar fell against most major currencies on concerns it may have gained too much ahead of a Federal Reserve meeting.

The People's Bank of China set the midpoint rate at 6.8934 per US dollar prior to market open, firmer than the previous fix of 6.9086.

The spot market opened at 6.9015 per US dollar and was changing hands at 6.9007 at midday, -79 pips away from the previous late session close and 0.11 per cent weaker than the midpoint.

"The central bank wants to stabilise market expectations of the yuan and does not want it to drop too fast, so big banks have been offering US dollars in the market for days and today it's around the 6.9 area," said a trader at a Chinese bank in Shanghai.

The trader noted that in January China residents will get a fresh quota for purchasing US dollars - they get buy up to US$50,000 a year - and said the central bank then "will be under heavy pressure to keep the yuan from depreciating".

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.9, weaker than the previous day's 95.12.

The US dollar fell against most major currencies on Monday on concerns that the Federal Reserve could suggest in its next policy statement that the greenback's gains have gone too far, while a rally in oil prices boosted commodity-linked currencies.

The US central bank is widely expected to raise interest rates on Wednesday for the first time this year and only the second time since the global financial crisis.

The offshore yuan was trading -0.38 per cent away from the onshore spot at 6.9273 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 7.1785, -3.97 per cent away from the midpoint.

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

REUTERS