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Yuan firms as corporates take profits on US dollar ahead of Fed decision

[SHANGHAI] China's yuan firmed against the US dollar on Wednesday as companies sold dollars to take profits on recent gains and square positions ahead of a Federal Reserve policy decision later in the session.

The Fed is widely expected to announce that it will start paring its balance sheet, with the reductions seen likely to start this year.

It is expected to keep rates on hold, but investors will be watching for fresh hints on the chances of another rate rise this year and how many could be expected in 2018.

Prior to the market opening on Wednesday, the People's Bank of China (PBOC) lowered its official midpoint to 6.5670 per US dollar, the weakest level since Sept 1, 140 pips or 0.21 per cent weaker than Tuesday's fix of 6.5530.

Market voices on:

But the market shrugged off the weaker fixing on Wednesday. In the spot market, the yuan opened at 6.5755 per US dollar and was changing hands at 6.5675 at midday, 185 pips firmer than the previous late session close but 0.01 per cent weaker than the midpoint.

The gains in the spot yuan rate was supported by US dollar selling by both traders and their bank clients, traders said. Corporates had snapped up US dollars on Monday and Tuesday.

Some companies with large US dollar positions were liquidating their positions to reduce exchange losses in morning trade, while traders were taking profits on long dollar positions and heading to the sidelines ahead of the Fed announcement.

"There remains huge uncertainty from the Federal Open Market Committee (FOMC) meeting, so market participants don't hold much positions for their proprietary trades. The market will pay close attention to the (Fed's) comments tonight," said a Shanghai-based trader at a foreign bank.

After a strong surge over the summer, the yuan has wobbled in recent sessions, reinforcing market views that the central bank may be worried about the impact of the currency's sharp appreciation on exporters and economic growth.

"We believe that a clearer RMB direction will emerge after the 19th Party Congress, which will reveal the China leadership reshuffle and road map of China reforms in coming five years," Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong wrote in a note on Wednesday.

The twice-a-decade Communist Party Congress is set to begin on Oct 18.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.55, firmer than the previous day's 95.39.

The global US dollar index fell to 91.764 from the previous close of 91.793.

The offshore yuan was trading 0.03 per cent weaker than the onshore spot at 6.5692 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 6.704, 2.04 per cent weaker than the midpoint.

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


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