China’s yuan eased on Thursday despite a broadly weaker dollar as investors bought the US currency on the cheap after the US Federal Reserve left rates on hold and signalled a slower pace of future rate hikes.
Traders also shrugged off a higher mid-point rate set by the People’s Bank of China, at 6.6513 per dollar – the strongest level since Aug.26, and firmer than the previous fix at 6.6738.
The spot market opened at 6.6611 per dollar and was changing hands at 6.6693 at midday, 33 pips weaker from the previous close and 0.27 percent weaker than the midpoint.
Traders said seasonal factors also played a role in dragging the yuan down as companies routinely purchase dollars to square their books by month-end and quarter-end.
“Many market participants believe the yuan could hardly strengthen further, so they are purchasing the dollars at the current levels,” said a trader at a Chinese bank in Shanghai.
“Meanwhile, investors are afraid that the central bank would not stay sidelined if the yuan breaches 6.67 per dollar level,” the trader added, noting the potential for large swings in Thursday’s thin trading session.
While the Fed signalled it could hike rates by year-end as the labour market improved further, it cut the number of rate increases expected in 2017 and 2018.
It also reduced its longer-run interest rate forecast to 2.9 percent from 3 percent. The less-hawkish Fed stance pressured the global dollar index, which measures the greenback against a basket of six major currencies, down more than 0.50 percent at one point overnight.
It was last at 95.512, down the previous close of 95.66.
The offshore yuan was trading 0.13 percent weaker than the onshore spot at 6.6782 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 6.851, 2.91 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.