China's yuan slips on weaker fix, but off early lows

[SHANGHAI] China's yuan weakened slightly against the US dollar on Friday after the central bank fixed its official guidance lower for a second straight day since it made changes to the midpoint mechanism last Friday.

The People's Bank of China set the midpoint rate at 6.7971 per US dollar prior to market open, weaker than the previous fix 6.7930.

The weakness in the yuan midpoint followed the US dollar's broad gains overseas after British Prime Minister Theresa May's Conservative Party appeared set to fall short of an expected majority in a general election.

The China Foreign Exchange Trade System (CFETS) trading platform, overseen by the People's Bank of China (PBOC), said last Friday that a "counter-cyclical factor" would be introduced into the way it calculates the yuan's reference rate each day allowing it to better reflect supply and demand.

In the domestic spot market, the yuan changed hands at 6.8000 per US dollar at midday, only five pips away from the previous close and 0.04 per cent softer than the midpoint. After opening at 6.8016 per US dollar, the yuan weakened to a low of 6.8033 before recovering.

For the week, the yuan was poised to advance 0.13 per cent against the US dollar, after strengthening around 0.65 per cent the previous weak, making sizable gains for a currency that normally trades in a wafer-thin range.

Traders said the domestic foreign exchange market was stable in morning trade, subdued by risk events overseas.

Multiple traders said even when the spot yuan weakened past 6.80 per US dollar they did not see major state-owned banks selling dollars, unlike last week when traders said official efforts helped the Chinese currency post is best performance since February 2016.

The domestic foreign exchange market was unaffected by data showing producer price inflation eased for a third straight month in May, signaling a broader cooling in economic activity.

Separately, economists at Goldman Sachs said on Friday that the recent surge in the Chinese yuan would not affect the currency's medium term weakening direction and forecast the yuan to fall to 7.20 per US dollar in 12 months.

"We expect the strengthening move to slow down from current levels - or even reverse - depending on the behavior of broad USD," MK Tang and Kamakshya Trivedi said in a note.

"That said, a one-way path of deprecation, even if it is gradual, would likely invite speculation and could potentially result in an overshooting of the exchange rate correction."

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.38, firmer than the previous day's 94.32.

The global US dollar index rose to 97.278 from the previous close of 96.918.

The offshore yuan was trading 0.19 per cent firmer than the onshore spot at 6.7871 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 6.9655, 2.42 per cent weaker than the midpoint.

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

REUTERS