August 9, 2019 / 5:15 AM / 10 days ago

China's yuan holds soft tone after worst week in over a year

    * Yuan in tight range as market awaits next steps in trade
war
    * Worst week for yuan since June 2018 after breaching 7 per
dollar
    * U.S. delays go-ahead for firms to trade with Huawei -
Bloomberg

    HONG KONG/SHANGHAI, Aug 9 (Reuters) - China's yuan inched
down against the dollar on Friday as traders awaited Beijing and
Washington's next moves in their bruising tariff tussle, taking
a breather after a rapid sell-off earlier this week that sparked
fears of an all-out currency war.
    As of midday, the yuan has lost 1.6% against the greenback
this week, marking its worst weekly loss since June 2018.
Onshore spot yuan was trading at 7.0512 per dollar, down less
than 0.1% on the day.
    China let the yuan slide past the key 7 per dollar level on
Monday for the first time since 2008, shortly after the United
States threatened to slap the remaining $300 billion of Chinese
goods with 10% tariffs. In the offshore market, the yuan crossed
the 7 barrier for the first time ever.
    Reuters forecasts show that the CFETS yuan index, which
measures it against a basket of currencies, also broke a new low
of 91.83 on Friday.
    The People's Bank of China set the mid-point,
which limits the yuan's onshore movement, at 7.0136 per dollar,
97 pips weaker than the previous fix and at the lowest since
2008 for a second consecutive session.
    The fixing was still stronger than what traders expected,
with market participants increasingly starting to see the yuan
trading around a new normal of 7.
    "By and large, the market has digested this," said one
trader in Shanghai with a foreign bank. "It doesn't mean the
currency won't bounce back, though in the short term, there are
still a lot of risks and uncertainty in the trade talks."
    Washington is delaying a decision about licences for U.S.
firms to restart trade with Huawei Technologies         ,
according to Bloomberg, while U.S. Senator Marco Rubio urged the
White House on Thursday not to allow exception to the ban.

    A second Shanghai-based trader said trade talks that were
scheduled for September in Washington, prior to the latest U.S.
tariff threat, now seem unlikely, adding further pressure on the
Chinese currency.
    But as the U.S. Federal Reserve carries on lowering interest
rates and widening the gap between U.S. and Chinese interest
rates, the yuan may climb back to the stronger side of 7 per
dollar, according to Ji Tianhe, China head of foreign exchange
and local markets strategy at BNP Paribas in Beijing.
    "Interest rate differential was an important factor leading
the yuan depreciation against the dollar last year as yields
between China and the United States shrunk sharply," he said.
    The yield gap between Chinese and U.S.
 benchmark 10-year government bonds stood at 134
basis points on Friday morning, compared with a low of 28 basis
points hit in November. A wider yield gap could mean less
capital outflow pressure from China and is supportive for the
Chinese currency.
    The Fed trimmed rates by 25 basis points for the first time
since the financial crisis last week. China did not immediately
follow and kept its main policy rates the same. Markets are
pricing in another Fed cut of the same size next month, and
another identical move the month after.

    The offshore yuan was trading 0.34 percent weaker
than the onshore spot at 7.0754 per dollar.
    The global dollar index fell slightly to 97.556 from
the previous close of 97.618.
    

    The yuan market at 4:00AM GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      7.0136   7.0039    -0.14%
                                       
 Spot yuan          7.0512   7.0455    -0.08%
                                       
 Divergence from    0.54%              
 midpoint*                             
 Spot change YTD                       -2.53%
 Spot change since 2005                17.38%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         91.61       91.72     -0.1
 Reuters/HKEX                          
 CNH index                             
 Dollar index    97.556      97.618    -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    7.0754    -0.34%
        *                        
 Offshore              7.1145    -1.42%
 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 Noah Sin and Winni Zhou; Additional reporting by
Jindong Zhang in SHANGHAI; Editing by Jacqueline Wong)
  
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