The yuan eased on Thursday after the central bank fixed a weaker midpoint for the daily trading range, but suspicions that state banks would sell dollars if the yuan were to slip further forestalled any pressure building on the Chinese currency.
The People’s Bank of China set the midpoint rate at 6.7736 per dollar prior to market open, weaker than the previous fix 6.7705.
The market was cautious and adopted a wait-and-see attitude at current levels, traders said, as the yuan has already lost more than 1.5 percent against the dollar so far this month.
The currency is on course to post its biggest fall since August last year, when the central bank made a surprise devaluation.
“The market was expecting that the state banks would step in to shore up the yuan, so everyone was vigilant,” said a Shanghai-based trader at a foreign bank. “But month-end dollar purchases by some companies were unavoidable.”
Some companies need more dollars to repay foreign debt and make overseas payments due at the end of the month.The trader, along with a colleague at another foreign bank in Shanghai, said some state-owned banks were selling dollars, but it was hard to distinguish whether they were offering dollar liquidity on behalf of the central bank or trading on their own behalf.
The spot market opened at 6.7777 per dollar and was changing hands at 6.7775 at midday, 69 pips weaker than the previous late session close and 0.06 percent softer than the midpoint. The second trader expected the state banks would definitely take action to support the yuan if the spot rate crossed 6.8 per dollar.
“The authorities would not want the spot rate to easily breach the 6.8 level, that would press the panic button in the market,” said the trader, adding that market sentiment was stable in morning trade.
Market watchers said the 6.8 per dollar level was significant for both the authorities, as there was a consensus in the market that the yuan would depreciate to that level by the end of the year.
In the offshore yuan market, the offshore yuan weakened to fresh six-year low in morning trade, touching 6.7921 per dollar, the weakest level since October 2010 when Reuters data on CNH were available.
The dollar index, which measures the greenback against a basket of six major currencies, stood at 98.682, after touching 99.119 on Tuesday, its highest since Feb. 1. The index has risen about 3.2 percent this month, putting it on track for its best month in nearly a year.
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 6.9425, 2.43 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.