May 31, 2016 / 9:31 AM / 3 years ago

Yuan posts 2nd biggest monthly fall as Fed rate view heats up dollar

(Updates figures to official close)
    SHANGHAI, May 31 (Reuters) - The yuan posted its second
largest monthly fall on record against the dollar on Tuesday
after the central bank softened its midpoint to a 5-year low
amid growing expectations of a U.S. interest rate hike as soon
as June.
    The yuan ended May 1.6 percent lower, its biggest monthly
drop since it fell 2.7 percent in August 2015 when the central
bank devalued the currency.
    While global investor fears of another sharp "one-off"
devaluation of the yuan appear to have eased, they remain
concerned about China's foreign exchange policy. Most analysts
expect the currency to continue to drift as long as the dollar
remains strong and China's economy slows.
    "The bearish pressure facing the yuan right now comes from
the strong performance of the dollar, which is within market
expectations," said a trader at a Chinese commercial bank in
Shanghai.
    "Traders and their corporate clients believe this bout of
yuan depreciation will not last. Overall, the sentiment is
stable."
    The People's Bank of China on Tuesday set the midpoint rate
 at 6.579 per dollar prior to the market open, only
0.01 percent weaker than the previous fix of 6.5784 and within
market expectations.
    Spot yuan opened at 6.5801 per dollar and was
changing hands at 6.5851 around 4:30 pm (0830 GMT), 0.05 percent
softer than the previous close.
    The market officially closes at 4:30 pm, with the PBOC
announcing the close at 6.5846, but there is an evening session
that will last until 11:30 pm.
    Economists at ANZ believe the yuan will end the year at 6.65
to the dollar.
    "Post a likely June/July Fed rate hike, if the market thinks
the next hike may not come so soon, there could be an interim
retracement, but the medium term outlook for the RMB remains,"
they said in a research note last week.
    Pessimistic bets on the yuan have risen to the largest since
early February, according to a Reuters survey of 20 fund
managers, currency traders and analysts last week. 
    The yuan's monthly drop in May also exceeded its December
decline of 1.5 percent, when the Federal Reserve interest rate
hike that month led to a record monthly fall in China's foreign
exchange reserves. 
    In recent months, the People's Bank of China has succeeded
in staunching capital outflows and pressure on forex reserves,
helped in part by waning expectations of a U.S. rate increase at
the time.
    By late trade on Tuesday, the yuan was trading 0.07 percent
softer in offshore markets than the onshore spot at 6.5899 per
dollar.
    Offshore one-year non-deliverable forwards contracts
, considered the best available proxy for
forward-looking market expectations of the yuan's value, traded
at 6.7650, 2.75 percent weaker than the midpoint.

    The yuan market at a glance: 
    
    ONSHORE:
 Item               Current  Previous  Change
 PBOC midpoint      6.579    6.5784    -0.01%
                                       
 Spot yuan          6.5851   6.5815    -0.05%
                                       
 Divergence from    0.09%              
 midpoint*                             
 Spot change YTD                       -1.39%
 Spot change since 2005                25.69%
 revaluation                           
 
*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    6.5899    -0.07%
        *                        
 Offshore              6.765     -2.75%
 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 the Shanghai Newsroom; Editing by Sam Holmes and
Kim Coghill)
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