July 27, 2018 / 5:32 AM / 21 days ago

China's yuan slips even as state banks push forwards down

SHANGHAI (Reuters) - China’s yuan finished domestic trade at its weakest in 13 months on Friday, dragged lower by the central bank’s midpoint and fears of further depreciation amid Sino-U.S. trade tensions.

FILE PHOTO: Chinese 100 yuan banknotes are seen in this picture illustration taken July 11, 2013. REUTERS/Jason Lee/File Photo

The Chinese currency is set for its seventh week of losses, its longest losing streak since November 2015, and that comes even as state-run banks aggressively push down yuan funding costs in the currency market.

The onshore yuan finished its domestic trading session at 6.8246 to the dollar, the weakest such close since June 26, 2017, after opening at 6.8050.

For the second day in a row, major state-owned Chinese banks were seen swapping dollars for yuan in the forwards markets, two traders said.

Their operations dragged one-year tenor dollar/yuan swap points down into negative territory.

The one-year contract stood at -100 points as of 0830 GMT, the lowest since February 2014, compared with the previous close of 15 points. That meant the yuan was trading much stronger against the dollar in one-year forward contracts than its spot value.

Twelve-month forward points on the offshore yuan - or the spread between the spot rate and the forwards outright - were however still positive, and stood at 202 points as of 0830 GMT after dropping to a low of 170 points, the lowest since 2011.

Traders, however, said dollar bids were low despite it having become cheaper to short-sell yuan.

Analysts and traders suspected the falls in the swap points were mainly reflecting the shrinking yield gap between the world’s two largest economies, while state bank activity intensified the declines.

“Fall in the swap points was mainly led by the shrinking interest rate gap between China and United States. The market expects the PBOC to continue to ease to cause declines in funding rates, while monetary tightening in the U.S. is a sure thing,” said David Qu, market economist at ANZ in Shanghai.

Some traders said banks acquired dollars via swaps in the forwards market and immediately sold them into the spot market, and such dollar selling supported the yuan. However, other market participants believed it was banks’ proprietary trades to lock in profits in dollars that bolstered the yuan.

“Some investor liquidated their long dollar positions and took profit at around 6.82, given the dollar index has not rallied much,” said a trader at a Chinese bank.

WEAKER GUIDANCE

Prior to market opening, the People’s Bank of China set the midpoint rate at 6.7942 per dollar, 280 pips weaker than the previous fix.

The fixing, which largely matched forecast, reflected the weakness in the euro overnight as the European Central Bank clung to its easy money policy and signaled no change in its timetable to move away from ultra low rates or end its bond purchase programme. [FRX/]

If the onshore yuan finishes the late night session at the domestic closing level, it would have lost 0.56 percent to the dollar. The yuan has depreciated 5.8 percent since mid-June.

Ongoing Sino-U.S. trade frictions remained a key market focus, and any signs of escalation would likely pile additional pressure on the Chinese currency.

“The Sino-U.S. trade situation may turn more difficult, especially if the positive developments with EU and NAFTA afford the U.S. more room to be firm with China,” OCBC Bank wrote in a note on Friday.

Separately, a Reuters poll published on Thursday suggested that investors piled bearish bets on the Chinese yuan to the highest on record.

The offshore yuan was trading 0.12 percent weaker than the onshore spot at 6.8291 per dollar as of 0830 GMT.

Editing by Jacqueline Wong

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