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China's yuan slips to weakest in 4 months, breaches key level

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China's yuan stumbled to its weakest in more than four months on Tuesday, falling past a psychologically important level after the central bank's softer fixing and broad US dollar strength.

[SHANGHAI] China's yuan stumbled to its weakest in more than four months on Tuesday, falling past a psychologically important level after the central bank's softer fixing and broad US dollar strength.

"The authorities are sending a message that they are comfortable with the current trading range, albeit the spot rate breached the 6.4 per US dollar level," said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.

Mr Cheung believes that Beijing is "happy to see the yuan turn weaker" as the currency has strengthened against its trade-weighted basket which raises concerns about the country's export competitiveness.

The Chinese currency hit a peak in late March this year at 6.2418, when it was up 4.2 per cent against the greenback since the start of the year. It is now up 1.5 per cent year-to-date.

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Prior to market opening, the People's Bank of China lowered its official yuan midpoint to 6.4021 per US dollar, 59 pips or 0.1 per cent weaker than the pervious fix at 6.3962. Tuesday's official fixing was the weakest since Jan 22.

In the spot market, the onshore yuan opened at 6.4050 per US dollar, and fell to a low of 6.4177 per US dollar at one point in morning trade, the weakest since Jan 18.

The US dollar firmed against a basket of major currencies amid weakness in the euro as investors took a grim view over the prospect of fresh elections in Italy.

The global US dollar index, a gauge that measures the unit's strength against six other currencies, stood at 94.346 at midday, around a 6-1/2-month peak hit on Monday night.

Some analysts also pointed to domestic factors for the yuan's weakness.

Weaker-than-expected investment and retail sales in April, persistently weaker central bank yuan guidance and a recent spate of corporate bond defaults all suggest further downside for the Chinese currency.

As of midday, the onshore spot rate was changing hands at 6.4124, 155 pips weaker than the previous late session close and 0.16 per cent softer than the midpoint.

The market remained largely stable in morning trade despite the losses, traders said, adding they did not see major state-owned banks stepping in to prop up the yuan.

In late 2015 and 2016, big banks were seen selling US dollars as part of official efforts to support the renminbi when the local currency faced depreciation pressure.

Some market participants noted that the offshore spot rate had fallen below the key level ahead of onshore trade, and led its onshore counterpart lower on Tuesday morning.

The offshore yuan was trading at 6.4121 per US dollar as of midday.

A trader at a Chinese bank said continuous corporate dollar selling in recent weeks had helped steady the yuan, but such sales eased off after the yuan breached 6.4.

Mizuho's Mr Cheung expects the yuan to face more pressure, possibly weakening to 6.5 per US dollar this year.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 98.22, weaker than the previous day's 98.41.

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 6.5225, 1.85 per cent weaker than the midpoint.

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

REUTERS