China's yuan pulls up, but still near 8-1/2-year lows; outlook bearish

[SHANGHAI] China's yuan firmed against the US dollar on Tuesday, but still hovered near 8-1/2-year lows, as the outlook for the greenback remained bullish after a relentless rally over the past several days in the wake of Republican Donald Trump's US election win.

The People's Bank of China (PBOC) set a higher official fix for the first time in nearly three weeks at 6.8779, helping the yuan tick up slightly. The previous fix was 6.8985, which was the 12th straight day of weak mid-points set by the central bank.

Like many of its emerging market peers, the yuan has been under pressure recently, slipping close to in 8-1/2-year lows on Monday, and sparking worries about outsized fund flows and potential intervention by the PBOC to prop up the currency.

Reuters reported last week that Chinese policymakers are ready to slow its descent for fear of fanning capital flight if the currency falls too quickly through the psychologically important 7-per-US dollar level, policy advisers said.

The worries of a rapid fall in the yuan was echoed by a former member of the PBOC's Monetary Policy Committee, who said on Tuesday that the new way China fixes the yuan exchange rate "encourages" capital flight and has led to a gradual depreciation of the currency.

Traders said markets are keeping an eye on state banks, which usually enter foreign exchange trade on behalf of the PBOC.

"US dollar purchases by companies are strong in morning trade today, but market participants have a feeling that the state banks may want to guard the yuan at the 6.9 level," said a trader at a Chinese bank in Shanghai.

The US dollar index, which tracks the US currency against a basket of six rivals, pulled back from 13-1/2 year highs, and last traded at 100.85 around midday, from the previous close of 101.05.

The US dollar has been led higher by a dramatic rise in US Treasuries since Mr Trump's Nov 8 election upset, with markets betting that Mr Trump's policies will boost spending, growth and inflation - setting the course for faster-than-expected Federal Reserve rate increases.

The rebound in the Chinese yuan would likely be short-lived, traders said, noting the outlook for the US dollar remains bullish. That view was also backed by analysts downgrades of the yuan in recent days, with most seeing a softer underbelly for the Chinese currency over the next year.

The spot market opened at 6.8880 per US dollar and was changing hands at 6.8907 at midday, 37 pips firmer than the previous late session close and 0.19 per cent softer than the midpoint. It was still close to levels last seen in June, 2008.

The yuan has fallen around 1.6 per cent so far this month.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.11, weaker than the previous day's 95.34.

The offshore yuan was trading 0.29 per cent weaker than the onshore spot at 6.9108 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 7.0855, 2.93 per cent weaker than the midpoint.

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

REUTERS