China's yuan firms on state bank support, weak corporate US dollar demand

[SHANGHAI] China's yuan firmed on Tuesday as major state-owned banks sold US dollars, while weak demand by companies for the US currency also offered a helping hand, traders said.

The People's Bank of China set the midpoint rate at 6.9468 per US dollar prior to the market opening, weaker than the previous fix of 6.9312.

"The midpoint was back to normal, and US dollar demand by companies was not so strong at current levels, so the market was relatively stable," said a trader at a Chinese bank in Shanghai.

The market was confused by Monday's official guidance rate, which was set at a much firmer level than traders had expected.

"But the state banks were 'on duty' in morning trade," the trader added, noting that state-owned banks were selling US dollars in the onshore forex market as the spot rate opened at an 8-1/2-year low of 6.95 per US dollar.

State-owned banks have offered US dollar liquidity regularly over the past two months in what traders believe is part of efforts to support the Chinese yuan from falling too fast.

The spot market was changing hands at 6.9507 at midday, 6 pips firmer than the previous late session close and 0.05 per cent softer than the midpoint.

Separately, the yuan was little changed after the Bank of Japan kept monetary policy steady and offered a brighter view of the economy on Tuesday.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.05, firmer than the previous day's 95.8.

The global US dollar index fell to 103.08 from the previous close of 103.14.

In the offshore market, Hong Kong's overnight yuan borrowing rate still hovered at an elevated level with the CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor) rising to 10.81733 per cent, compared with 10.00000 per cent a day earlier.

Overnight implied deposit rates for offshore yuan - another indicator showing the state of demand in the market - climbed as high as 12.389 per cent at one point in morning trade, Reuters data showed.

The offshore yuan was trading 0.09 per cent firmer than onshore spot at 6.9443 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 7.264, 4.37 per cent away from the midpoint.

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

REUTERS