Yuan firms against US dollar but weakens against currency basket

[SHANGHAI] China's yuan firmed against the US dollar on Tuesday following a firmer guidance rate setting from the central bank and a weaker dollar index, but it weakened against a calculated basket of currencies following five days of gains.

The yuan's sharp firming against a trade-weighted basket of currencies began last week amid a meeting of finance heads from the Group of 20 economies in Chengdu.

China won plaudits during the meeting for improving the transparency of its fixing mechanism that brought its daily midpoint setting more in line with market trading. However, traders believe the People's Bank of China (PBOC) still intervenes in the market to keep the onshore spot from crossing the psychologically important 6.7 per dollar.

The PBOC set the midpoint rate at 6.6778 per US dollar prior to market open, firmer than the previous fix 6.686. Traders have recently pointed out the midpoint was being used to drag the currency higher, although Tuesday's setting has aligned with trader forecasts.

"The PBOC has stepped up intervention to keep the yuan stable, in particular managing the closing rates," said a dealer at a European bank in Shanghai.

"With the closing rates officially managed, the midpoint is also under the central bank control. In addition to a relatively stable dollar index, the yuan has been able to maintain stability of late."

The spot market opened at 6.6780 per US dollar and was changing hands at 6.6793 at midday, 13 pips away from the previous late session close and 0.02 per cent away from the midpoint. The spot rate is currently allowed to trade within a 2 per cent range above or below the official fixing on any given day.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.97, weaker than the previous day's 96.1.

The global dollar index fell to 97.17 from the previous close of 97.286.

The offshore yuan was trading -0.11 per cent away from the onshore spot at 6.6867 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 6.841, -2.39 per cent away from the midpoint.

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

REUTERS