August 8, 2019 / 3:24 AM / 10 days ago

Yuan firms as PBOC signals intent to stabilise decline

    * PBOC sets midpoint weaker than 7/dlr for first time since
2008
    * PBOC might have heavily used counter-cyclical factor in
midpoint
fixing - traders
    * Fixing shows 7/dlr not a "red line" for PBOC- analyst 

 (Updates prices, adds details)
    By Winni Zhou and Andrew Galbraith
    SHANGHAI, Aug 8 (Reuters) - China's yuan strengthened
against the dollar on Thursday, despite the central bank setting
its official midpoint past the key level of 7-per-dollar for the
first time since global financial crisis.
    The People's Bank of China (PBOC) set the midpoint rate
 at 7.0039 per dollar prior to the market open, 43
pips weaker than the previous fix of 6.9996.
    While this was the weakest central bank fixing since April
21, 2008, it was firmer than market expectations and seen as a
signal that authorities wanted to stabilise the decline in the
currency following this week's sharp falls. 
    Broad weakness in the official guidance rate came after
heavy losses in the spot yuan, as tensions between
China and the United States spread to foreign exchange policy
with Washington earlier this week declaring China a currency
manipulator.
    On Monday, the onshore currency weakened past the
psychologically important 7 per dollar mark for the first time
in 11 years.
    "After the market broke 7, it was just a matter of time
before the fixing broke the same level," said Frances Cheung,
head of Asia macro strategy at Westpac in Singapore.
    The onshore spot market opened on Thursday at 7.0402 per
dollar and was changing hands at 7.0425 at midday, 171 pips
firmer than the previous late session close. Its offshore
counterpart was trading at 7.0659 per dollar,
recovering from Wednesday's close of 7.0823.
    Although the yuan stablised on Thursday, the onshore spot
rate has already lost 2.1% of its value to the greenback since
U.S. President Donald Trump said last week he would impose fresh
tariffs on the remaining $300 billion of Chinese imports from
Sept. 1.
    Investors have been closely tracking the PBOC's official
fixing this week looking for clues on Beijing's currency stance
to guide their yuan positions, as they were worried that the
extended trade war between China and the United States could
become a currency war.
    Ken Cheung, senior Asian FX strategist at Mizuho Bank in
Hong Kong, said the fixing confirmed the psychologically key
level was not the "red line" for the yuan.
    "USD/CNY trading above 7 is a new reasonable equilibrium.
And PBOC signals to allow gradual RMB depreciation at an orderly
pace," he said.
    "PBOC is less committed to keeping RMB steady after the
breakdown of trade talks."
    Analysts said Thursday's midpoint was much stronger than
their forecasts, suggesting the central bank might have used the
so-called "counter-cyclical factor" intensively.
    The counter-cyclical factor, first introduced in May 2017 to
the midpoint formula, is widely interpreted by the market as an
official tool to reduce price swings and temper depreciation
expectations.
    On Thursday, the official guidance rate was 0.24% stronger
than Reuters' estimate of 7.0205 per dollar.
    Against a basket of 24 currencies created by the China
Foreign Exchange Trading System, or CFETS, yuan's value
 fell to 91.99, the lowest level since the index was
introduced at the start of 2015, according to Reuters
calculation based on official data.
    The CFETS index is only published once a week.
    In an effort to slow the yuan's decline, China's major
state-owned banks have this week been active in the yuan
forwards markets, using swaps to curb dollar supply, sources
told Reuters on Wednesday.
    Four sources with knowledge of the matter said that state
banks were seen swapping yuan for dollars in onshore forwards
market to support the Chinese unit. Buy-sell swaps
help to reduce the supply of dollars that the market can access
to short-sell the yuan.
    Market participants believe major state-run banks often act
on behalf of the PBOC in the country's foreign exchange market.
    
    The yuan market at 0411 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      7.0039   6.9996    -0.06%
                                       
 Spot yuan          7.0425   7.0596    0.24%
                                       
 Divergence from    0.55%              
 midpoint*                             
 Spot change YTD                       -2.41%
 Spot change since 2005                17.52%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         91.79       91.86     -0.1
 Reuters/HKEX                          
 CNH index                             
 Dollar index    97.535      97.544    0.0
 
    
    
*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    7.0659    -0.33%
        *                        
 Offshore              7.1038    -1.41%
 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 Andrew Galbraith; Editing by Simon
Cameron-Moore)
  
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