October 25, 2017 / 5:14 AM / a year ago

China's yuan weakens on broad dollar strength, Fed leadership in focus

SHANGHAI (Reuters) - China’s yuan weakened against the dollar on Wednesday, in line with a much softer fixing, following a rise in the greenback, which was underpinned by reports of Republican senators’ support for John Taylor to become the next U.S. Federal Reserve chief.

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

Prior to market opening, the People’s Bank of China (PBOC) lowered its midpoint rate for the third straight day to 6.6322 per dollar, 54 pips or 0.08 percent weaker than the previous fix of 6.6268 on Tuesday.

Wednesday’s midpoint was the weakest since Oct.9. And traders said the official guidance was in line with their forecasts.

Onshore yuan opened at 6.6356 per dollar and was changing hands at 6.6433 at midday, 103 pips weaker than the previous late session close and 0.17 percent softer than the midpoint.

Traders said the market was largely balanced on Wednesday morning, with spot yuan tracking the dollar. The greenback was bolstered by speculation of a more hawkish Federal Reserve chief.

U.S. President Donald Trump used a lunch with Senate Republicans on Tuesday to get their views on who he should tap to be the next leader of the Fed, according to senators who attended.

A source familiar with the matter said Trump polled the Republicans on whether they would prefer Stanford University economist John Taylor or current Fed Governor Jerome Powell for the job.

More senators preferred Taylor over Powell, the source said. Taylor is seen as someone who may put the Fed on a path of faster interest rate increases.

Some market participants expect volatility in yuan trade to pick up after the Communist Party Congress, which finished on Tuesday. The market had remained largely stable during the congress, with ample liquidity in the country’s financial system.

“It will be interesting to gauge just how much of a ‘decisive role’ the market will play in the economy into year end,” Stephen Innes, head of Asia-Pacific trading at OANDA in Singapore said in a note.

“So far these comments are following on deaf ears as its likely state-owned entities were keeping the market in check over the China summit to avoid any extreme awkwardness,” he said.

A dealer at a Chinese bank in Shanghai said the domestic market would keep a close eye on the global dollar index in the near term.

He said the yuan would face some renewed downward pressure if the dollar index breached the 94 level soon. The global dollar index rose to 93.984 as of midday from the previous close of 93.772.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.66, firmer than the previous day’s 95.61.

The offshore yuan was trading 0.06 percent weaker than the onshore spot at 6.6394 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 6.793, 2.37 percent weaker than the midpoint.

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

Reporting by Winni Zhou and John Ruwitch; Editing by Jacqueline Wong

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