China's yuan rebounds as market gets cautious about rapid losses

SHANGHAI (Reuters) - China’s yuan rebounded against the dollar on Tuesday, clawing back losses from the previous session as market participants grew wary of regulators’ tolerance for recent selling after the currency breached a key level.

FILE PHOTO: A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration/File Photo

The Chinese currency has retreated more than 1,900 pips from a 21-month peak hit on Aug. 8. While authorities were likely to have been uncomfortable with rapid gains in the preceding months, they are also likely to have been uncomfortable with more recent losses.

Market participants also expect authorities will want to keep the yuan relatively stable in the run-up to a key Communist Party meeting starting on Oct. 18.

Prior to market opening on Tuesday, the People’s Bank of China lowered its official yuan midpoint weaker than the psychologically important 6.6 per dollar level for the first time in nearly a month.

Tuesday’s official guidance came in at 6.6076 per dollar, 131 pips or 0.2 percent weaker than the previous fix of 6.5945 on Monday.

The official yuan fix on Tuesday was the weakest since Aug. 31 and below market forecasts. Some traders say authorities are likely to want to hose down major depreciation expectations in the Chinese currency.

In the spot market, the yuan opened at 6.6165 per dollar and fell to a low of 6.6262 per dollar at one point in morning trade.

But the yuan pared losses with the spot rate changing hands at 6.6145 by midday, 44 pips firmer than the previous late session close but 0.10 percent weaker than the midpoint.

Traders said the market was cautiously testing lows in the onshore spot yuan in morning trade as the prices have been traded around 200 pips lower than the same day’s fixing over the past few sessions.

“For proprietary trade, market participants thought the (USD/CNY) prices were slightly higher, with some choosing to short USD/CNY,” said a trader at a Chinese bank in Shanghai.

The proprietary trade, along with some corporate dollar selling, offered support for the onshore yuan.

Any disruptions in markets or the economy would be unwelcome ahead of the Communist Party Congress, where President Xi Jinping hopes to strengthen and extend his leadership of the party.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.34, flat with the previous day’s 95.34.

The global dollar index fell to 92.564 from the previous close of 92.648.

The offshore yuan was trading 0.09 percent firmer than the onshore spot at 6.6087 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 6.7515, 2.13 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.

Reporting by Winni Zhou and David Stanway; Editing by Sam Holmes