1. China’s yuan firms on stronger guidance, but dollar demand may pick up

China’s yuan firms on stronger guidance, but dollar demand may pick up

China's yuan edged up against the U.S. dollar on Tuesday after the central bank set guidance at its strongest in three weeks, but traders said corporate demand for the greenback could pressure the Chinese currency in the coming days.

By: | Published: May 16, 2017 11:41 AM
The People’s Bank of China set its official midpoint at 6.8790 per dollar prior to the market open, its strongest since April 24.

China’s yuan edged up against the U.S. dollar on Tuesday after the central bank set guidance at its strongest in three weeks, but traders said corporate demand for the greenback could pressure the Chinese currency in the coming days. The People’s Bank of China set its official midpoint at 6.8790 per dollar prior to the market open, its strongest since April 24. Tuesday’s fixing was 62 pips, or 0.09 percent, firmer than the previous setting at 6.8852.

The firmer yuan midpoint reflected the dollar’s weaker global trend, following a soft U.S. manufacturing report, which dragged down the dollar index. The New York Federal Reserve said on Monday its barometer on business activity in New York state unexpectedly fell in May, sinking into negative territory for the first time since October. However, the stronger midpoint was much firmer than expectations, adding to market views that the authorities were seeking to guide the yuan higher.

In the spot market, the yuan opened at 6.8929 per dollar and was changing hands at 6.8926 at midday, 44 pips firmer than the previous late session close and 0.20 percent weaker than the midpoint. “The market was stable. Corporate dollar demand and sales were balanced,” said a trader at a Chinese bank. The trader added that seasonal factors could soon push up dollar demand as domestic firms start to purchase dollars to square their books by month-end, while foreign firms may start to repatriate profits overseas at the end of the quarter.

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Some market players said spot yuan was trading narrowly, with major state-owned banks not seen selling dollars in morning trade. Large banks often act on behalf of the central bank to stabilise the yuan. Pressure on the yuan has eased somewhat, with net foreign exchange sales by China’s central bank falling to the lowest in nearly two years in April as capital outflows eased amid strict regulatory curbs and a pause in the dollar’s rally.

The PBOC sold a net 42 billion yuan ($6.10 billion) worth of foreign exchange in April, down from 54.7 billion yuan in March, according to Reuters calculations based on central bank data on Monday. Separately, during the Belt and Road Forum held from May 14-15, Chinese President Xi Jinping pledged $124 billion for his new Silk Road plan to boost global development.

PBOC officials also touted the use of local currencies instead of the U.S. dollar or other major currencies in the Belt and Road initiative, saying this would reduce dependence on major currencies and the risks of exchange rate fluctuations. But a Shanghai-based trader at a foreign bank said the language used to promote yuan internationalisation was “ambiguous” and did not expect any near-term impact in the domestic market.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.87, weaker than the previous day’s 93.94. The global dollar index fell to 98.804 from the previous close of 98.911. The offshore yuan was trading 0.08 percent firmer than the onshore spot at 6.8874 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 7.0755, 2.78 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

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