China's yuan eases, unexpected FX reserve rise fails to cheer market

[SHANGHAI] The yuan slipped against the US dollar on Friday, even after China reported a surprise increase in June foreign exchange reserves, while traders said a weakening yuan could trigger more capital outflows in coming months.

The yuan is set to weaken around 0.5 per cent for the week if it closes around Friday's midday level.

The country's foreign exchange reserves rose US$20 billion in June to US$3.21 trillion, recovering from a five-year low in May, central bank data showed on Thursday. June's increase was the biggest in 14 months.

Traders said the data showed the central bank was scaling back interventions in the market.

"The central bank has been buying dollars from the swaps market in June, which might cause the surprising rise in FX reserves," said a trader at a Chinese commercial bank in Shanghai.

"By adding extra dollars to its FX reserves, the bank is reassuring companies and residents that there's no need to panic, despite recent slides in the yuan."

The People's Bank of China set the midpoint rate at 6.6853 per US dollar prior to market open, 0.05 per cent weaker than the previous fix 6.682.

Spot yuan opened at 6.6880 per US dollar and was changing hands at 6.6876 at midday, easing 0.07 per cent from the previous close.

Bets on further declines in the Chinese yuan hit a five-month high in the last two weeks on expectations that the central bank will allow it to weaken further to support the world's second-largest economy, a Reuters poll showed.

"Bearish outlook on the yuan has strengthened again," said a trader at a European bank in Shanghai.

"The reality of yuan weakening to almost 6.7 in such a short time has finally hit home." "But I expect the PBOC will keep a firm hand as always," the trader said.

The offshore yuan was trading 0.19 per cent softer than the onshore spot at 6.7 per US dollar.

REUTERS