China's yuan weakens as dollar continues to climb

[SHANGHAI] China's yuan slipped on Monday after the central bank dropped the trading midpoint to its weakest rate since September 2009 following the dollar's best week in a year.

The People's Bank of China set the midpoint rate at 6.8291 per dollar prior to market open, about 0.26 per cent weaker than the previous fix of 6.8115.

To a large extent, the yuan has mirrored the dollar in recent weeks as the greenback has gained strength and surged after the US presidential election. The global dollar index rose to 99.482 from the previous close of 99.06.

The yuan has dropped some 0.7 per cent against the dollar since last Wednesday, when it became clear during the Asian trading day that Republican Donald Trump had won the US election.

"The yuan is weaker mainly because the US dollar is stronger, which is natural because US bond yields are rising. There's also recently an increase in demand for foreign currencies in the retail market due to depreciation expectations," a trader at a mid-sized Chinese lender said.

The spot market opened at 6.8180 per dollar and was changing hands at 6.8262 at midday, 112 pips weaker than the previous late session close. The spot rate is currently allowed to trade with a range 2 per cent above or below the official daily fixing.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.31, firmer than the previous day's 94.91.

The offshore yuan was trading at 6.832 per dollar.

"I think the yuan will fluctuate within a relatively narrow range around 6.8 in the short term, and further weaken to 7 within a year," said a trader at a foreign bank in Shanghai.

"It's affected by the offshore market which has been roiled by the US presidential election. But I don't think that Trump's accusation of China being a currency manipulator will have big influence on the yuan in the longer term, even after he takes office. His power is likely to be limited by the US political system," the trader said.

"The currency faces downward pressure mostly because of the slowing economy and capital outflows from China." 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 7.019, 2.71 per cent weaker than the midpoint.

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

REUTERS