China's yuan slips on corporate dollar demand, but liquidity still tight

HANGHAI - 24 August 2017: China's yuan weakened against the U.S. dollar on Thursday, in spite of the central bank setting daily guidance at a fresh 11-month high as companies stepped up their dollar purchases.

Cash conditions remain tight, but traders said the stronger central bank fixing triggered corporate bargain hunting for dollars in morning trade.

"Companies were buying dollars, while corporate dollar sales diminished at around 6.66 per dollar level," said a trader at a Chinese bank in Shanghai.

Prior to market opening, the People's Bank of China set the midpoint at 6.6525 per dollar, the strongest since Sept. 22, 108 pips or 0.16 percent firmer than the previous fix of 6.6633.

The strength in the midpoint reflected broad dollar weakness on Wednesday after U.S. President Donald Trump suggested a shutdown of the government was possible and threatened to terminate the North American Free Trade Agreement.

In the spot market, the yuan opened at 6.6555 per dollar and was changing hands at 6.6626 at midday, 51 pips weaker than the previous late session close and 0.15 percent softer than the midpoint. The yuan is largely flat this week.

In contrast to companies, some market participants said they were liquidating long yuan positions to stop losses.

Tight liquidity persisted as the central bank net drained funds through open market operations for the fourth straight day on Thursday, traders said, although the benchmark 14-day repo rate eased off a five-month high hit on Wednesday.

The market is also monitoring the annual central banking conference in Jackson Hole, Wyoming held from August 24-26 where global central bankers may signal their next policy actions.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.86, firmer than the previous day's 94.85.

The global dollar index rose to 93.272 from the previous close of 93.147.

The offshore yuan was trading 0.05 percent firmer than the onshore spot at 6.6596 per 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 6.7964, 2.12 percent weaker than the midpoint.

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