China’s yuan little changed, set to weaken slightly for the quarter

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Shanghai | Published: September 30, 2016 11:28:04 AM

The yuan stayed flat versus the dollar on Friday, with onshore markets closed next week for a national holiday, and the International Monetary fund inducting the Chinese currency into its reserves basket, known as Special Drawing Rights, on Saturday.

The yuan was set to show a 0.3 percent depreciation for the quarter, reflecting the central bank's determination to keep the currency broadly stable despite its weaker tendency. Traders expect the the yuan to stay moving sideways when trading resumes on Oct. 10. (Reuters)The yuan was set to show a 0.3 percent depreciation for the quarter, reflecting the central bank’s determination to keep the currency broadly stable despite its weaker tendency. Traders expect the the yuan to stay moving sideways when trading resumes on Oct. 10. (Reuters)

The yuan stayed flat versus the dollar on Friday, with onshore markets closed next week for a national holiday, and the International Monetary fund inducting the Chinese currency into its reserves basket, known as Special Drawing Rights, on Saturday.

The yuan was set to show a 0.3 percent depreciation for the quarter, reflecting the central bank’s determination to keep the currency broadly stable despite its weaker tendency. Traders expect the the yuan to stay moving sideways when trading resumes on Oct. 10.

“People may tend to take a wait-and-see attitude right after holiday because of uncertainties surrounding the yuan’s SDR inclusion,” said a senior trader at a European bank in Shanghai. “However, Hong Kong’s offshore market performance during the Chinese holiday may give some hints to where the onshore yuan is likely to go over the coming weeks and months.”

The People’s Bank of China set the midpoint rate at 6.6778 per dollar prior to market open, weaker than the previous fix 6.6700. Spot yuan opened at 6.6688 per dollar and was changing hands at 6.6698 as of 0500 GMT, only 3 pips away from the previous close.

Traders said views were mixed about the potential impact that SDR inclusion could have on the yuan. Inclusion should increase global demand for the yuan as foreign institutions, particularly official organisations, will build up fresh positions in the Chinese currency.

However, inclusion in the SDR basket requires Beijing to gradually loosen its grip on the tightly-controlled exchange rate regime which may result in depreciation pressure in the near term, traders said. The yuan is already under downward pressure due to a strengthening U.S. dollar and China’s weak economic growth.

It is widely believed that, without official intervention, the yuan would be much weaker. Most traders believe the central bank will intervene if the yuan fluctuates sharply after the holiday. The IMF reviews the openness of an SDR countries’ currency mechanisms only once in five years.

That leaves China enough time to gradually reform its exchange rate regime, while continuing to intervene in trading to help stabilise the yuan, traders say.

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