China's yuan weakens as companies load up on cheaper US dollars

[SHANGHAI] China's yuan weakened against the US dollar on Wednesday, as companies took advantage of a broad slide in the greenback to stock up on the US currency, dragging down the Chinese unit in the mainland market.

The daily official midpoint, guided by the People's Bank of China, was fixed at a more than two-month high of 6.8525 per US dollar, 467 pips or nearly 0.7 per cent stronger than the previous fix of 6.8992.

The strength in the midpoint came after the global US dollar index wallowed near a six-week low, pressured by US President-elect Donald Trump's comments that the US dollar may be "too strong".

However, gains in the yuan were soon erased by strong corporate US dollar demand, traders said.

"Banks' clients quickly took advantage of the weak US dollar and started purchasing," said a trader at a Chinese bank in Shanghai.

He said US dollar buying started when the yuan strengthened to around 6.85 per US dollar on late Tuesday.

In the spot market, the yuan opened at 6.8588 per US dollar and was trading at 6.8605 at midday, 104 pips weaker than the previous late session close and 0.12 per cent softer than the midpoint.

The market largely ignored remarks by Chinese president Xi Jinping at the World Economic Forum in Davos on Tuesday that China would not devalue its currency or start a trade war.

Many currency strategists see the yuan drifting lower again this year if the US dollar remains firm, but don't entirely rule out the possibility of a large one-off devaluation. Some say there is even an outside chance of a move to a free float if pressure on the yuan and China's forex reserves intensifies.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.08, weaker than the previous day's 96.17.

The global US dollar index rose to 100.5 from the previous close of 100.33.

The offshore yuan was trading 0.62 per cent away from the onshore spot at 6.8182 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 7.0985, 3.47 per cent weaker than the midpoint.

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

REUTERS