Yuan eases on dollar demand, snapping a 3-day winning streak

SHANGHAI - 29 August 2018: China’s yuan weakened against the U.S. dollar on Wednesday, snapping a three-day winning streak, pulled lower by rising corporate demand for cheaper greenbacks.

The yuan showed some stability early in the week and paused its steep downtrend after the central bank moved to put a floor under the currency as the trade war with the United States grinds on.

Late on Friday, the People’s Bank of China (PBOC) announced that earlier in August it started changing the way it calculated the yuan’s mid-point, resuming use of a “counter-cyclical” variable. This was a further sign Chinese authorities did not want the yuan to keep weakening after a record 10 straight weeks of losses.

“The market is looking for a bottom on the ‘counter-cyclical factor’ and on the pragmatic scale, the Fed is still going to raise rates and ultimately that should favour the USD,” Stephen Innes, Singapore-based head of Asia-Pacific trading for OANDA, said on Wednesday.

Prior to market opening on Wednesday, the PBOC set the midpoint rate at 6.8072 per dollar, 20 pips weaker than the previous fix of 6.8052.

The guidance rate was 25 pips firmer than Reuters’ estimate of 6.8097 per dollar.

In the spot market, the onshore yuan opened at 6.8090 per dollar and was changing hands at 6.8138 at midday, 108 pips weaker than the previous late session close and 0.10 percent softer than the midpoint.

Traders said the morning moves followed corporate clients’ dollar buying, which dragged spot yuan lower.

They also said some major state-owned Chinese banks were spotted selling small amounts of dollars. But the traders were unsure whether the selling represented big banks’ proprietary trading, or was done on behalf of the central bank to prevent the yuan from falling too fast.

“Despite USD/CNY’s return to 6.80, its volatility is converging with and exceeding G7 FX volatility for the first time in history,” Bank of America Merrill Lynch said in a note to clients on Wednesday.

The note added that a slew of market stabilising measures rolled by the central bank were “consistent with managing CNY in a broader range”. It maintained its forecast for the yuan to trade at 6.95 per dollar at the end of 2018.

The dollar steadied against a basket of major currencies after touching a four-week low overnight as optimism over the U.S.-Mexico trade deal gave way to caution ahead of a deadline in the China-U.S. trade dispute. [FRX/]

The dollar index, a gauge measures its strength against six other major currencies, stood at 94.708 after falling to 94.434 overnight, its lowest since July 31.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.62, weaker than the previous day’s 93.67.

The offshore yuan was trading 0.12 percent firmer than the onshore spot at 6.8055 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 6.8533, 0.67 percent weaker than the midpoint.

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

The yuan market at 0413 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.8072 6.8052 -0.03%

Spot yuan 6.8138 6.803 -0.16%

Divergence from 0.10%

midpoint*

Spot change YTD -4.50%

Spot change since 2005 21.47%

revaluation

Key indexes:

Item Current Previous Change

Thomson 93.62 93.67 -0.1

Reuters/HKEX

CNH index

Dollar index 94.708 94.72 0.0

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan * 6.8055 0.12%

Offshore 6.8533 -0.67%

non-deliverable

forwards **

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint..