1. China’s yuan weakens on strong corporate demand for dollars

China’s yuan weakens on strong corporate demand for dollars

China's yuan weakened against the US dollar on Tuesday, dragged down by strong corporate dollar purchases. Traders said there was no impact from the suspected terrorist attack in the English city of Manchester.

By: | Published: May 23, 2017 10:45 AM
Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.8661 yuan per dollar, firmer than the previous fix of 6.8673.

China’s yuan weakened against the US dollar on Tuesday, dragged down by strong corporate dollar purchases. Traders said there was no impact from the suspected terrorist attack in the English city of Manchester. Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.8661 yuan per dollar, firmer than the previous fix of 6.8673.

Tuesday’s fixing, like those made in recent weeks, was stronger than the market expected. A trader at a Chinese bank in Shanghai speculated that authorities may want to use a firmer guidance to “suppress the (USD/CNY) rate from testing higher” as corporate demand for the U.S. currency has been high. In the run-up to June 30, both foreign and domestic companies traditionally have increased demand for dollars.

Foreign firms usually start to repatriate profits overseas and the domestic ones begin to purchase dollars to square their books when the quarter-end is approaching. In the spot market on Tuesday, the yuan opened at 6.8862 per dollar and was changing hands at 6.8900 at midday, 8 pips weaker than the previous late session close and 0.35 percent softer than the midpoint.

“The correlation between the official guidance and the transaction prices has been getting weak recently,” said another Shanghai-based trader, noting the yuan’s spot rate has not been firming as the midpoint settings would suggest it has.

Tuesday’s midpoint pulled the index for the yuan’s value based on a trade-weighed basket to 92.14 from 92.29 a day earlier, its lowest since the measure was inaugurated in late 2015, according to Reuters calculations based on official data from the China Foreign Exchange Trade System (CFETS).

The CFETS publishes index figures on a weekly basis. The loss in the CFETS index continued to “sync up with the DXY (global dollar index),” OCBC Bank said in a note. The global dollar index fell to 96.939 from the previous close of 96.984. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.19, weaker than the previous day’s 93.32.

The offshore yuan was trading 0.14 percent firmer than the onshore spot at 6.8806 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 7.0635, 2.79 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

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