China's yuan weakens as US dollar hits 3-week high, but no panic selling

[SHANGHAI] China's yuan weakened to a three-week low against the greenback in the first trading session after the meeting between US President Donald Trump and Chinese leader Xi Jinping, as the US dollar strengthened amid reinforced expectations of further US rate hikes.

But there was no panic selling in the Chinese currency as signs of stabilisation in China's foreign exchange reserves underline Beijing's success in stemming capital outflows.

The People's Bank of China set the midpoint rate at 6.9042 per US dollar prior to market open, weaker than the previous fix of 6.8949.

The spot market opened at 6.9066 per US dollar with the currency changing hands at 6.9068 at midday, 58 pips away from the previous late session close.

The Trump-Xi meeting appears to have had little impact on the forex market. Singapore's OCBC Bank said the meeting "is more about building a personal relationship," and that the message on trade policy is a bit confusing.

The yuan's weakness comes as the US dollar index, which tracks the greenback against six major rival currencies, rose to three-week highs after a key US Federal Reserve official reinforced the central bank's commitment to interest rate hikes. Higher US rates would make US dollar assets more attractive.

But Wang Peng, economist at China Development Bank Securities, said the US dollar index may peak next year, potentially reversing expectations that the yuan will depreciate further.

"Yuan has already stabilised a lot against the dollar this year, and market expectations are starting to change," Mr Wang said, ruling out the possibility of another big drop this year, following the yuan's 6.5 per cent slump in 2016.

Reflecting a change in market outlook, yuan has been changing hands this year at a stronger level in the offshore market than in the onshore market, reversing a pattern last year, he said.

Also showing reduced depreciation pressure, China's forex reserves stayed above US$3 trillion in March, marking the first time reserves had increased two consecutive months since April 2016.

"Since China strengthened controls on capital outflows at the start of 2017, the supply-demand relationship in the forex market has basically been in equilibrium," Tommy Xie, economist at OCBC Bank said in a note.

REUTERS