1. Yuan firms, but heads for biggest weekly drop since January

Yuan firms, but heads for biggest weekly drop since January

China's yuan firmed against the dollar on Friday, after the central bank set a stronger midpoint for the first time in days, but traders and analysts warned of continued pressure after the currency had its biggest weekly slide since January.

By: | Shanghai | Published: October 14, 2016 3:07 PM
For the week, the yuan was down 0.76 percent against the dollar, with traders saying the fall was mostly driven by dollar strengthening. China's weaker-than-expected trade data also dented sentiment. (Reuters) For the week, the yuan was down 0.76 percent against the dollar, with traders saying the fall was mostly driven by dollar strengthening. China’s weaker-than-expected trade data also dented sentiment. (Reuters)

China’s yuan firmed against the dollar on Friday, after the central bank set a stronger midpoint for the first time in days, but traders and analysts warned of continued pressure after the currency had its biggest weekly slide since January.

For the week, the yuan was down 0.76 percent against the dollar, with traders saying the fall was mostly driven by dollar strengthening. China’s weaker-than-expected trade data also dented sentiment.

The yuan’s post-holiday slide does not seem to have triggered a rush for the exits – yet.

“The pressure on the yuan is gradually building. Six-point-seven was a key level of resistance which has now been broken, and there is a lot of market positioning above that, both onshore and offshore,” said Kevin Lai, Chief Economist Asia Ex-Japan at Daiwa Capital Markets in Hong Kong.

“We expect there will be a lot of selling now.”

The People’s Bank of China set the midpoint rate at 6.7157 per dollar prior to market open, firmer than the previous fix 6.7296.

The spot market opened at 6.7223 per dollar and was changing hands at 6.7250 by late afternoon, 6 pips away from the previous close and 0.14 percent away from the midpoint. The spot rate is allowed to trade with a range 2 percent above or below the official fixing on any given day.

While a sharply stronger dollar – up 1.3 percent on the week against major currencies – was a major factor weighing on the yuan, weak export data released Thursday and signs of renewed large-scale capital outflows are also pressuring China’s currency, analysts say.

In September, China’s dollar-denominated exports fell 10 from a year earlier, sharply underperforming market expectations of a 3 percent fall and the worst performance for a month since February. For the time being, individual savers did not appear to be in a rush to swap their savings out of yuan-denominated assets.

“We haven’t seen a major panic in the market yet, and at present the forex market for individuals is still pretty calm, so the yuan should really be thanking the people (for its relative stability),” said a senior analyst at a major Chinese bank. Some analysts blamed the export drop on factory closures near Hangzhou ahead of China’s hosting of the G20 summit there.
Others said it reflected more fundamental weakness in global demand which could pressure major exporters such as China to allow further currency weakness to defend market share.

“The continued underwhelming performance of Chinese exports adds weight to our view that the People’s Bank will maintain its recent policy of gradual trade-weighted renminbi depreciation in coming quarters,” wrote Julian Evans-Pritchard, China economist at Capital Economics on Thursday.

As the resurgent greenback put pressure on currencies around the world the yuan actually strengthened against a basket of currencies.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.26, weaker than the previous day’s 95.42 but up from last Friday’s closing rate of 94.97.

The global dollar index rose to 97.687 from the previous close of 97.516.

The offshore yuan was trading 0.15 percent weaker than the onshore spot at 6.735 per dollar. The offshore yuan, too, was down about 1 percent since September 30 – the last day mainland markets were open before the Oct. 1-9 National Day holiday.

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 6.9065, -2.76 percent away from the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

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