China’s yuan weakened on Tuesday on strong dollar purchases by companies, while traders said state-owned banks sold dollars at around 6.67 in an effort to keep the Chinese currency stable. Prior to market open, the People’s Bank of China set the midpoint rate at 6.6595 per dollar, firmer than the previous fix of 6.6786.
The spot market opened at 6.6710 per dollar and was changing hands at 6.6691 at midday, 3 pips weaker than the previous late session close and 0.14 percent weaker than Tuesday’s midpoint.
“The wish of companies to purchase dollars is very strong this morning as it is approaching the end of the month,” a Shanghai-based trader at a Chinese bank said. Routinely, companies purchase dollars to square their books by month-end and quarter-end. Big state banks “were very active in intraday trade, pressing the yuan to stronger than 6.67 per dollar,” the trader added.
The trader and one other said they suspected that state-owned banks, in the face of strong dollar purchases, were selling them on behalf of the central bank to keep the yuan from depreciating below the psychologically-important threshold of 6.7 to the dollar. Some companies are anxious about possible policy changes coming out of meetings this week of the Bank of Japan and the U.S. Federal Reserve. Some Chinese investors “decided to purchase dollars today, ahead of the meetings, to avoid any surprise,” said another trader at a Chinese bank in Shanghai. China’s commercial banks sold a net $9.5 billion of foreign exchange in August, down 70 percent from July and the lowest since July 2015.
Such a drop signalled that pressure on capital outflows eased last month as the currency market stabilised, the regulator said. The offshore yuan was trading 0.05 percent weaker than the onshore spot at 6.6727 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 6.8545, or 2.84 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.