China’s yuan eased on Friday after the central bank weakened its yuan midpoint by the most in three months, but the Chinese currency is on course for a winning week, thanks to a volatile US dollar. The People’s Bank of China set its official midpoint at 6.8786 per dollar prior to the market open on Friday, snapping a six-day winning streak, 174 pips or 0.25 percent weaker than the previous guidance at 6.8612, the biggest daily percentage loss since Feb. 20.
The weakness in the yuan midpoint came after a rebound in the U.S. dollar overnight in the global markets, supported by solid U.S. economic data that helped temper a sell-off triggered by political tumult in Washington. However, the much weaker fixing on Friday was still stronger than market expectations, traders said, and such a situation has remained for weeks.
In the spot market, the yuan opened at 6.8937 per dollar and was changing hands at 6.8925 at midday, 65 pips weaker than the previous late session close and 0.20 percent weaker than the midpoint. For the week, the yuan is set to gain 0.1 percent against the U.S. unit. “The dollar demand by bank clients was strong and pushed the (USD/CNY) transaction prices higher in morning trade,” said a dealer at a Chinese bank, but added the market was still trying to find direction.
Gao Qi, FX strategist at Scotiabank in Singapore noted that the 4:30 p.m. yuan settlement price has been persistently weaker than the fixing since April. “It reflects hovering market concerns over the yuan’s potential depreciation,” Gao said. Traders also said they had not seen major state-owned banks selling dollars in the market this week to prop up the Chinese currency.
The big state banks often act on behalf of the central bank to stabilise the yuan from falling too fast. A Reuters poll of 15 analysts and traders showed that long positions in the Chinese yuan rose slightly from two weeks ago and reached the largest since July 2015, one month ahead of the surprise devaluation of the yuan that trigger a rout in global financial markets. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.56, firmer than the previous day’s 93.51.
The global dollar index fell to 97.808 from the previous close of 97.879. The offshore yuan was trading 0.08 percent firmer than the onshore spot at 6.8868 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.