China’s yuan firmed against the dollar on Wednesday, supported by a significantly stronger midpoint, traders said.
The official fixing by the People’s Bank of China was the strongest in nearly two weeks at 6.7562 per dollar, due to weakness in the greenback. Tuesday’s fix was 6.7734.The dollar was dragged down as the Nov. 8 U.S. presidential election increasingly looked too close to call.
The global dollar index fell to 97.651 by midday on Wednesday, slightly above a two-week trough of 97.640 plumbed the previous day.Traders said uncertainty over the election was overshadowing economic fundamentals in the foreign exchange market, as the U.S. Federal Reserve would be unlikely to raise its interest rates this week.
“It is really hard to predict how the dollar will move ahead of the presidential election,” said a trader at a Chinese bank in Shanghai, adding dollar moves would play a key role in the yuan’s performance in the short term.
In the spot market, the yuan opened at 6.7655 per dollar and was changing hands at 6.7646 at midday, 34 pips firmer than the previous late session close and 0.12 percent softer than the midpoint.
In morning trade, companies were taking advantage of the stronger midpoint to purchase dollars, but the spot rate hovered at just below 6.7650 levels, where state banks were selling dollars, traders said.
“This makes the yuan (effectively) pegged to a basket of currencies. When major non-dollar currencies are rising, the yuan should appreciate, too,” said the trader.Separately, some analysts said they expected the yuan’s more than 1.5 percent loss of value against the dollar in October to have eroded China’s foreign exchange reserves significantly.
“We expect China’s FX reserves to therefore have declined by around $50 billion in October to $3.11 trillion, its lowest since mid-2011,” Wang Tao, chief China economist at UBS, wrote in a note on Tuesday.China will report its latest forex reserve figures on Nov. 6-7.
The offshore yuan was trading 0.14 percent weaker than the onshore spot at 6.7739 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 6.9435, 2.70 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.