August 28, 2018 / 1:44 AM / a month ago

Yuan extends bounce after PBOC raises mid-point most in 15 months

SHANGHAI (Reuters) - China’s yuan firmed against the U.S. dollar for the third day in a row on Tuesday after the central bank moved to put a floor under the currency as the trade war with the United States grinds on.

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

Prior to the market opening, the People’s Bank of China (PBOC) raised its daily yuan midpoint by almost 0.7 percent, the most in nearly 15 months.

But the jump in the official mid-point fixing sparked corporate demand for cheaper dollars, capping the yuan’s gains in the spot market.

In onshore trade, spot yuan CNY=CFXS opened at 6.8128 per dollar. It finished domestic trade at 0830 GMT at 6.8070, 90 pips or 0.1 percent firmer than the previous late night session close. The domestic close was the strongest since Aug.1.

Its offshore counterpart CNH=D3 was trading at 6.7998 as of 0830 GMT.

The PBOC confirmed market suspicions late on Friday by announcing it had started changing the way it calculates the mid-point earlier in August, in a further sign that Chinese authorities are wary of letting the yuan weaken further after a record 10 straight weeks of losses.

But market watchers say the yuan will face persistent depreciation pressure as the Sino-U.S. trade battle deepens and China continues to ease policy to support its cooling economy.

Early on Tuesday, the PBOC lifted the official yuan midpoint CNY=PBOC to 6.8052 per dollar, 456 pips firmer than the previous fix of 6.8508 and largely matching market forecasts.

The move in the official guidance rate was the biggest one-day strengthening in percentage terms since June 1, 2017.

The guidance rate was 4 pips lower than Reuters’ estimate of 6.8048 per dollar.

Market watchers believe the re-introduction of the mysterious “counter-cyclical factor” in the PBOC’s calculations is largely aimed at stabilising the currency, not turning it around. The bank had already taken several steps in recent months to make it more expensive to short the currency.

“It does not make sense to see a much stronger CNY from both the economic and trade war perspectives. In our view, the CNY’s weakness is justified as the economy is still struggling between growth, debt and leveraging,” Zhou Hao, analyst at Commerzbank in Singapore said in a note.

Recent easing measures in monetary policy also imply a weaker bias for the currency, he said, adding it would not be in China’s interest to engineer a firmer yuan while the trade dispute with the United States drags on.

Bargain hunting for cheaper dollars remained strong, traders said, as many saw strong resistance at 6.8 per dollar, which is an important psychological level for the market for now.

Many analysts including Commerzbank’s Zhou expect the onshore yuan to finish 2018 at that a level.

“The reinstatement of the ‘counter-cyclical factor’ has effectively dampened interest in being long dollars. But corporate dollar demand reignited when the dollar softened overnight,” said a trader at a Chinese bank, noting the yuan’s short-term movements will remain at the mercy of progress in Sino-U.S. trade talks.

The dollar steadied in global markets after falling to a four-week low overnight, after the United States and Mexico agreed to overhaul the North American Free Trade Agreement, boosting optimism for an easing of global trade tensions.

“The PBOC may have dodged a bullet by implementing the ‘counter-cyclical factor’ at a time of USD weakness, allowing the USD-CNY to slip lower without the additional resistance of broad USD strength. The key level to watch is now the 6.8000 handle,” Terence Wu, FX strategist at OCBC Bank in Singapore, said in a note.

“At this juncture, a break lower from that level may give RMB (yuan) bulls greater confidence to push the spot levels down further.”

Reporting by Winni Zhou and Andrew Galbraith; Editing by Kim Coghill and Eric Meijer

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