China's yuan inches up in thin trade after week-long holiday

SHANGHAI (Reuters) - China’s yuan inched up against the U.S. dollar on Monday on the first day of trading after a week-long National Day holiday amid thin liquidity and as traders awaited cues on the currency ahead of a key national leadership meeting next week.

FILE PHOTO: Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016. REUTERS/Kim Kyung-Hoon/File Photo

The yuan lost about 1 percent of its value against the greenback in September, its first monthly loss since April.

Traders said stability in the yuan would remain the priority for the authorities in the run-up to the twice-a-decade party congress, which kicks off on Oct. 18.

Markets believe the currency’s rapid rise earlier this year is likely to have unnerved authorities. However, a more recent decline in the month before the break is also likely to have made currency regulators uncomfortable.

Prior to market opening on Monday, the People’s Bank of China lowered its official yuan midpoint to 6.6493 per dollar, the weakest level since Aug. 25, reflecting strength in the greenback overseas last week when the domestic market was closed for National Day holiday.

The official guidance was 124 pips or 0.19 percent weaker than the previous fix of 6.6369 on Sept. 29.

In the spot market, the yuan opened at 6.6550 per dollar and was changing hands at 6.6350 at midday, 178 pips firmer than the previous late session close on Sept.29, and 0.22 percent stronger than the midpoint.

Some market participants were still on holiday, which kept liquidity thin on Monday morning, traders said, noting that transactions could cause huge swings in the spot yuan rate.

The daily trading volume stood at $6.214 billion as of midday.

A Shanghai-based trader at a foreign bank said there was some slight corporate dollar buying in morning trade but that the market is still trying to determine what the next direction for the yuan is likely to be.

Market watchers said the Chinese currency would likely face some renewed downward pressure later this year amid dollar strength in global markets.

The wage data from the U.S. September labour market report on Friday was seen as a sign of potentially improving inflation and gave the dollar a lift, as it bolstered expectations for the Federal Reserve to raise interest rates again in December.

Separately, China’s central bank on Sept. 30 cut the amount of cash that some banks must hold as reserves for the first time since February 2016 in a bid to encourage more lending to struggling smaller firms and energise its lacklustre private sector.

The PBOC is due to release its September foreign exchange reserves data later on Monday. A Reuters poll suggested that the reserves were expected to have risen for an eighth month to $3.1 trillion last month.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.87, firmer than the previous day’s 95.61.

The global dollar index fell to 93.765 from the previous close of 93.8.

The offshore yuan was trading 0.13 percent firmer than the onshore spot at 6.6265 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 6.782, 1.96 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 Sam Holmes