China’s yuan weakened against the U.S. dollar on Monday despite a firmer midpoint fixed by the central bank, as heavy corporate dollar demand emerged. The yuan also struck a record low against a currency basket first introduced in 2015. The People’s Bank of China set the midpoint rate at 6.8673 per dollar prior to market open, firmer than the previous fix 6.8786. The fix was stronger than the market had expected, although the central bank has been tending this way for many weeks.
In the spot market, the yuan opened at 6.8840 per dollar and was changing hands at 6.8900 at midday, 30 pips weaker than the previous close and 0.33 percent softer than the midpoint. “Corporate dollar demand was very strong in morning trade, partially due to seasonal factors,” said a Shanghai-based trader at a Chinese bank, adding the strong demand for the greenback has triggered some depreciation expectations in the market.
The heavy dollar purchases came from both foreign and local companies on Monday, as the foreign ones usually start to repatriate profits overseas and the domestic firms begin to purchase dollars to square their books when the quarter-end is approaching. Another trader at a Chinese bank said the spot rate had been hovering at around 6.9 per dollar level longer than expected, and the domestic market was still trying to find direction with market participants becoming cautious.
The yuan strengthened nearly 0.2 percent to the U.S. dollar last week, but the index for the yuan’s value based on a trade-weighed basket fell to a new record low since the data was available in late 2015. The index fell to 92.49 last Friday, 0.6 percent lower than a week earlier, according to official data from the China Foreign Exchange Trade System (CFETS).
Monday’s yuan midpoint dragged the index down further to a fresh record low of 92.29, according to Reuters calculations based on official CFETS data. The CFETS publishes index figures on a weekly basis. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.33, weaker than the previous day’s 93.49.
The global dollar index rose to 97.262 from the previous close of 97.142. The offshore yuan was trading 0.16 percent firmer than the onshore spot at 6.879 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 7.0715, 2.89 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.