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China's yuan set for best week since July on state bank buying, drooping dollar
December 2, 2016 / 4:50 AM / in 8 months

China's yuan set for best week since July on state bank buying, drooping dollar

6 Min Read

SHANGHAI, Dec 2 (Reuters) - China's yuan firmed against the
dollar on Friday and looked set for its biggest weekly gain in
more than four months, thanks to continued support from
state-owned banks and a retreat in the U.S. dollar, traders
said.
    Major state-owned banks sold dollars in the market for a
fifth straight trading day, traders said, offsetting dollar
purchases by companies on Friday.
    "The dollar's retreat overseas offered a chance for the yuan
to firm slightly, but the overall trend for the yuan to
depreciate has not been changed," said a trader at a Chinese
bank in Shanghai.
    In the spot market, the yuan opened at 6.8830 per
dollar and was trading at 6.8835 at midday, 30 pips firmer than
the previous late session close and 0.06 percent weaker from the
midpoint.
    The People's Bank of China fixed the midpoint rate
 at 6.8794 per dollar on Friday, the strongest level
in nearly two weeks and firmer than the previous fix of 6.8958.
    Despite firming in recent sessions, the yuan has still lost
nearly 6 percent of its value against the dollar so far this
year, reviving worries about a surge in capital outflows even as
the economy is showing signs of stabilising.
    Market watchers predict it to recoil further next year, with
dollar strength expected to persist on hopes that
President-elect Donald Trump will be able to shift the U.S.
economy into higher gear.
    A Reuters poll of more than 50 foreign exchange analysts
this week suggested that the yuan would likely trade at 6.90 per
dollar by the end of this month, and then depreciate steadily to
7.14 in a year, which would mark its lowest level in nearly a
decade. 
    "We have nudged our forecasts, and now think it will breach
7 sooner rather than later, and end next year close to 7.3," 
Capital Economics said in a note on Friday.
   "But we do not expect a repeat of the renminbi 'crisis' that
sent shockwaves through other emerging markets a year ago. We do
expect (economic) growth to slow next year, but a hard landing -
fears of which were behind the sell-off last year - remains
unlikely."
    The global dollar index edged down to 100.77 around
midday from the previous close of 101.04, as investors
consolidated gains ahead of the U.S. jobs report later in the
day.
    The Shanghai trader also noted that some participants in the
market were holding long yuan positions to hedge against
potential risks from any unexpected results from Italy's
constitutional referendum on Sunday.
    "At least they won't lose money if Italy becomes the new
black swan for financial markets," the trader added.
    In the offshore market, the yuan has mostly trading at a
discount to onshore spot, but was at a firmer level at one point
overnight and in early trade on Friday, partly due to liquidity
tightness in Hong Kong after China tightened controls on some
cross-border yuan outflows, some traders said. 
    The CNH Hong Kong Interbank Offered Rate benchmark (CNH
Hibor), set by the Treasury Markets Association, rose to 7.159
percent for overnight contracts on Friday, the highest in two
months. It was 4.81833 percent on Thursday. 
    The offshore yuan was trading just 15 pips softer than the
onshore spot at 6.8850 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 7.086, 2.92 percent weaker than the midpoint.
    One-year NDFs are settled against the midpoint, not the spot
rate.

    The yuan market at 0359 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.8794   6.8958    0.24%
                                       
 Spot yuan          6.8835   6.8865    0.04%
                                       
 Divergence from    0.06%              
 midpoint*                             
 Spot change YTD                       -5.66%
 Spot change since 2005                20.24%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         95.62       95.55     0.1
 Reuters/HKEX                          
 CNH index                             
 Dollar index    100.77      101.04    -0.3
 
    
    
*Divergence of the dollar/yuan exchange rate. Negative number
indicates that spot yuan is trading stronger than the midpoint.
The People's Bank of China (PBOC) allows the exchange rate to
rise or fall 2 percent from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.885     -0.02%
        *                        
 Offshore              7.086     -2.92%
 non-deliverable                 
 forwards                        
               **                
 
*Premium for offshore spot over onshore 
**Figure reflects difference from PBOC's official midpoint,
since non-deliverable forwards are settled against the midpoint.
. 
    

    
 (Reporting By Winni Zhou and John Ruwitch; Editing by Kim
Coghill)

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