China’s yuan weakened against the U.S. dollar on Thursday after the central bank fixed its official midpoint at a fresh three-week low, while corporate demand for the greenback also weighed on the Chinese currency. The People’s Bank of China set the midpoint rate at 6.8197 per dollar before the market opened, the weakest level since May 31 and softer than the previous fix at 6.8193. In the spot market, corporate demand for the U.S. currency played a dominant role in morning trade, dragging down the yuan further, traders said.
“Seasonal dollar demand has been high recently on company dividend distributions and oil firm purchases for their businesses,” said a Shanghai-based trader at a Chinese bank. Spot opened at 6.8306 per dollar and was changing hands at 6.8317 at midday, 18 pips weaker than the previous late session close and 0.18 percent softer than the midpoint. Some analysts pointed out that the onshore yuan’s 0830 GMT settlement price has persistently traded lower than the same day’s guidance in the past week, despite the implementation of a so-called counter-cyclical factor to curb the yuan’s one-way depreciation expectations.
“We are staying vigilant on a wide gap between onshore spot and fixing. If the dollar weakens broadly, the elevated spot-fixing spread will spur a selloff in the dollar as with what happened in late May,” said Gao Qi, FX strategist at Scotiabank. China takes the official market closing price at 0830 GMT into consideration when it fixes the official guidance rate. The market also has an evening session lasting until 11:30 p.m. In late May, authorities suddenly allowed the yuan exchange rate to strengthen by more than 1 percent, a sizable leap for a currency that normally trades in a wafer-thin range and shed 6.5 percent last year.
The yuan’s renewed weakness comes on the back of gains in the dollar since the start of the month. Another trader at a Chinese bank said the yuan would likely continue its focus on movements in the dollar, with index provider MSCI’s decision to add some mainland A shares to a key index not having a significant impact in the near term. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.29, weaker than the previous day’s 94.43.
The global dollar index fell to 97.5 from the previous close of 97.559. The offshore yuan was trading 0.01 percent firmer than the onshore spot at 6.8308 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 7.0045, 2.64 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.