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China's yuan weakens, still set for best week in more than a month; interbank mixed

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China's yuan weakened against the US dollar on Friday but was still on course for its best week in more than a month, while interbank money rates were mixed for the week.

[SHANGHAI] China's yuan weakened against the US dollar on Friday but was still on course for its best week in more than a month, while interbank money rates were mixed for the week.

The People's Bank of China set the official yuan midpoint rate at 6.8456 per US dollar prior to market opening, the strongest level since Jan 24, 173 pips firmer than the previous fixing, which was 6.8629.

A trader at a Chinese bank in Shanghai said the strength in the yuan midpoint meant a cheaper US dollar, which attracted companies to stock up on the greenback in morning trade, in contrast to their heavy US dollar sales earlier this week.

The spot market opened at 6.8536 per US dollar and was changing hands at 6.8658 at midday, 118 pips weaker than the previous late session close and 0.30 per cent softer than the midpoint.

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Despite the losses in the yuan on Friday, the Chinese currency is set to gain around 0.2 per cent on the US dollar for the week - its best week since mid-January.

Another Shanghai-based dealer at a Chinese bank also saw strong demand for dollars from companies on Friday.

"Companies suddenly started purchasing dollars. And traders had to follow the trend and shored up long dollar positions," the dealer said, adding state-owned banks did not emerge to offer dollar liquidity in morning trade to curb the yuan from falling too fast.

Some analysts said earlier heavy corporate US dollar sales were a result of authorities' official window guidance, forcing some companies to liquidate dollar positions.

Separately, China's central bank sold a net 208.8 billion yuan (S$43.2 billion) worth of foreign exchange in January, the smallest amount since August 2016, according to Reuters calculations based on central bank data released on Friday.

In the money market, interbank rates were mixed for the week on Friday.

The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was 2.8323 per cent, nearly 25 basis points higher than the previous day's closing average rate. For the week, the repo rate was up more than 41 basis points.

Overnight and 14-day repo rates fell from a day earlier.

The surge in the seven-day repo rate was due to some tightness in liquidity conditions, because the central bank did not extend its temporary liquidity support at some banks, traders said.

Temporary liquidity facility (TLF) loans maturing on Thursday were not rolled over at some major Chinese commercial banks, two banking sources with direct knowledge of the matter told Reuters.

A liquidity trader at a Chinese bank said the rise in seven-day rates was also attributable to companies and banks' upcoming regular tax payments, which would suck cash out of the money market.

In open market operations, the PBOC drained a net 150 billion yuan through reverse repurchase agreement for the week.

On Wednesday, the PBOC lent 393.5 billion yuan to financial institutions through its medium-term lending facility, or MLF.

The fresh MLF loans more than doubled the size of maturing loans on the same day.

One batch with a total value of 151.5 billion yuan was set to mature on Wednesday. Another batch of 53.5 billion yuan would expire on Sunday, according to Reuters calculations based on official data.

The global dollar index rose to 100.46 from the previous close of 100.44.

The offshore yuan was trading 0.22 per cent firmer than the onshore spot at 6.8507 per 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 7.085, 3.38 per cent weaker than the midpoint.

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