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China's yuan weakens, but state banks lend support
[SHANGHAI] China's yuan weakened against the US dollar on Thursday, but losses were capped by state-owned banks selling the US currency in the domestic market to offset pressure from the stronger greenback, traders said.
Major state-owned banks were seen selling US dollars in the onshore forex market for a fourth consecutive day, traders said, in an apparent bid to support the renminbi after the US currency climbed in global markets on surging oil prices and strong private payroll data.
The US dollar index, which tracks a basket of six other major currencies, stood at 101.44 around midday after hitting 101.83 overnight, close to a 13-1/2-year high of 102.05 hit last week. The US dollar's renewed strength came as oil prices jumped around 9 per cent as oil cartel Opec agreed to cut output.
"The state banks are selling US dollars in the market again today, with the midpoint setting at a stronger level than we had thought," said a Shanghai-based trader at a Chinese bank.
"They were not selling US dollars at a specific level, as it would be meaningless to guard one level if the US dollar rises further," the trader said.
The People's Bank of China set the midpoint rate at 6.8958 per US dollar prior to market open, weaker than the previous fix 6.8865.
The spot market opened at 6.8955 per US dollar and was changing hands at 6.8944 at midday, 96 pips weaker than the previous late session close and 0.02 per cent away from the midpoint.
The gap between the onshore and offshore yuan shrunk again on Thursday to around 55 pips. The offshore yuan was traded at 6.9005 per US dollar around midday, less than 0.1 per cent weaker than the onshore spot.
Traders and analysts said a recent string of statements from policymakers supporting the yuan and fresh measures to stem capital outflows would only slow the pace of depreciation, and would not necessarily reverse the trend.
The yuan has gained 0.3 per cent against the US dollar so far this week, but was down nearly 1.6 per cent in November, booking the worst month since a one-off devaluation in August 2015.
Despite a slight rebound this week, spot yuan is still hovering at its weakest level in more than eight-and-a-half years.
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 7.0905, 2.75 per cent softer than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.