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China's yuan hits 10-month high, tops key 6.7 level on firmer midpoint, FX reserves

China's yuan.jpg
A week after China's central bank finally offered some explanation of the mysterious new 'X'-factor it has added to its daily yuan reference rate, traders and analysts say they are none the wiser over how to make sense of it.

[SHANGHAI] China's yuan strengthened to a 10-month high against the US dollar on Tuesday, breaching a key psychological level, after the central bank set a firmer guidance rate and data showed a larger-than-expected increase in the country's foreign exchange reserves.

Spot yuan rose more than 0.3 per cent to top 6.7 to the US dollar for the first time since October 10, buoyed as well by corporate dollar sales, traders said.

The gain was its biggest one-day rise since late June.

Prior to the market open, the People's Bank of China set the midpoint rate at 6.7184 per US dollar prior to market open, 44 pips or 0.07 per cent firmer than the previous fix of 6.7228.

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The yuan opened at 6.7150 per US dollar and was changing hands at 6.6990 at midday, 224 pips firmer than the previous late session close and 0.3 per cent stronger than the midpoint.

Its offshore counterpart also strengthened to its firmest level since October, briefly breaching the 6.71 mark. It was trading at 6.7040 by midday.

"The sharp rise in the yuan was a result of corporate dollar selling. Companies were getting more nervous after the recent rally in the yuan," said a trader at a foreign bank in Shanghai.

Companies with long US dollar positions were liquidating to reduce exchange losses, the traders said, adding that the pace of US dollar sales could accelerate if the yuan can hold above 6.7.

Forex markets were little fazed by weak trade data released on Tuesday morning.

China's exports and imports grew more slowly than expected in July, raising concerns over whether global demand is starting to cool even as major Western central banks consider scaling back their massive stimulus programmes.

But the yuan did draw support from data late on Monday which showed China's foreign exchange reserves rose twice as much as expected in July to a nine-month high, as tighter regulations and a weaker dollar continued to keep capital outflows in check.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.21, firmer than the previous day's 94.03.

The global US dollar index fell to 93.306 from the previous close of 93.432.

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 6.8425, 1.81 per cent weaker than the midpoint.

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