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China's yuan listless, boost from SDR inclusion may be fleeting

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China's yuan dipped on Wednesday but was little changed from the previous session ahead of week-long holidays.

[SHANGHAI] China's yuan dipped on Wednesday but was little changed from the previous session ahead of week-long holidays.

The People's Bank of China set the midpoint rate at 6.6681 per US dollar prior to the market open, weaker than the previous fix of 6.6646.

In the spot market, the yuan opened at 6.6678 per US dollar and was changing hands at 6.6716 at midday, 21 pips weaker than the previous late session close and only 0.05 per cent weaker than the midpoint.

"The market is quite balanced. Some banks and their clients were selling US dollars in morning trade, but the willingness to purchase the greenback by some companies was slightly stronger," said a trader at a Chinese bank in Shanghai, adding some investors sold US dollars ahead of next week's national holiday due to high costs of carrying US dollars.

The week-long National Day holiday begins on Oct 1, the same day the yuan is officially included in the International Monetary Fund's reserve basket, known as Special Drawing Rights (SDR).

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Foreign demand for the yuan had been expected to pick up as inclusion drew near, helping to offset persistent depreciation pressure.

But some analysts said the currency may see only a marginal boost from the move in the fourth quarter, as global central banks have likely made most of their yuan purchases already. The IMF announced the yuan's addition to its SDR basket last year.

"Additional demand for the Chinese yuan will amount to US$31 billion, which is a drop in the ocean of global liquidity," Chi Lo, greater China senior economist at BNP Paribas wrote in a note on Wednesday, referring to immediate impact after the yuan's inclusion into the SDR basket.

Some market watchers have estimated that up to nearly US$1 trillion of yuan purchases would happen in the next five years.

"If anything, the risk is that official intervention to keep the renminbi stable ahead of its inclusion will subsequently be paired back, allowing for renewed depreciation," Capital Economics said in a note this week.

The global dollar index rose to 95.565 from the previous close of 95.435.

The offshore yuan was trading 0.19 per cent softer than the onshore spot at 6.684 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 6.8285, 2.35 per cent weaker than the midpoint.

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


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