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Yuan skids to 3-month low as China's economic slowdown bites

 (Adds details, table, updates prices)
    SHANGHAI, Aug 19 (Reuters) - China's yuan slipped to a
three-month low against the dollar on Friday, breaching a key
threshold, after the central bank set a much weakened midpoint
guidance, with traders expecting further downside due to an
economic slowdown.
    Prior to market opening, the People's Bank of China (PBOC)
set the midpoint rate at 6.8065 per dollar, 263 pips
or 0.39% softer than the previous fix of 6.7802, the weakest
since Sept. 30, 2020.
    That dragged the spot market past the psychologically
important 6.8 per dollar level. The onshore yuan
opened at 6.8050 per dollar and fell to a low of 6.8150, the
softest level since May 13. 
    It traded at 6.8103 at midday, 233 pips weaker than the
previous late session close. A late night close at this level
would mean a loss of about 1% to the dollar for the week, its
worst weekly performance since mid-May.
    Its offshore counterpart followed suit to touch a
three-month low of 6.8288, before last fetching 6.8250.
    Currency traders and analysts said a firmer dollar and
weaker domestic economic fundamentals both contributed to the
yuan's declines.
    The selling pressure on the yuan has grown since the PBOC
surprised markets by cutting two key interest rates earlier this
week, traders say.
    "Due to intensified divergence in monetary policy between
China and the United States", U.S. yields were trading at a
higher premium over their Chinese peers, piling depreciation
pressure on the yuan, analysts at OCBC Wing Hang Bank said in a
note.
    The PBOC is set to take more easing steps, though policy
insiders and analysts say it faces limited room to manoeuvre due
to worries over rising inflation and capital flight.

    A Reuters survey forecast the central bank will cut its
benchmark lending rates on Monday, underlining the mounting
pressure on the economy.
    "We reiterate the USD/CNY 7.0 forecast for Q1 2023 with the
expectation that the PBOC will not cap further upside in USD/CNY
when the broad U.S. dollar uptrend resumes in coming weeks,"
analysts at RBC Capital Markets said in a note.
    A recent slew of data showed the economy unexpectedly slowed
in July, and recent power shortage and hot weather across the
country are also adding to the strains on growth.
    Moreover, a slowdown in the global economy and persistent
supply-chain snags have narrowed the policy options for China.
    The dollar surged to a one-month high earlier in the day as
Federal Reserve officials spoke of the need for further rate
hikes, and investors reevaluated minutes from the U.S. central
bank's July meeting as being more hawkish than originally
thought.
     
    The yuan market at 0400 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.8065   6.7802    -0.39%
                                       
 Spot yuan          6.8103   6.787     -0.34%
                                       
 Divergence from    0.06%              
 midpoint*                             
 Spot change YTD                       -6.69%
 Spot change since 2005                21.53%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson                               0.0
 Reuters/HKEX                          
 CNH index                             
 Dollar index    107.636     107.484   0.1
 
    
    
*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    6.825     -0.22%
        *                        
 Offshore              6.7463    0.89%
 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 Brenda Goh
Editing by Shri Navaratnam)
  
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