September 2, 2015 / 2:27 AM / 3 years ago

China's yuan slips on pre-holiday dollar demand despite intervention

SHANGHAI (Reuters) - China’s yuan weakened slightly on Wednesday as dollar demand ahead of public holidays the following two days offset a stronger official midpoint and state-bank dollar sales on behalf of the central bank, traders said.

A customer counts Chinese Yuan notes at a market in Beijing, August 12, 2015. REUTERS/Jason Lee

“Many people bought dollars today as banks need foreign exchange to prepare for possible demand from their customers during the holiday,” said one trader at a foreign bank in Shanghai.

On Wednesday, “some major state-owned banks sold dollars to help keep the yuan steady in line with the central bank’s firmer midpoint,” said another trader a foreign bank in Shanghai.

Despite holidays on Thursday and Friday, most Chinese banks will keep their main businesses running to meet corporate demand from companies doing business globally.

Financial markets will reopen on Monday.

For the rest of Wednesday, traders said they expected the yuan was likely to retain the trends seen early in the day.

The People’s Bank of China set the midpoint rate at 6.3619 per dollar prior to market open, 0.21 percent firmer than the previous fix of 6.3752.

The spot market opened at 6.3637 per dollar and was changing hands at 6.3650 at midday, 0.01 percent weaker from the previous day’s close.

Trading was relatively sluggish ahead of the holiday and because of reduced speculation after the PBOC informed commercial banks about new rules traders said it plans to implement curbing anticipation of yuan depreciation in the forwards markets.

The central bank will tighten rules on trading of currency forwards from October, sources with direct knowledge of the matter told Reuters on Tuesday, in a move to curb speculation and volatility in the wake of the Aug. 11 shock devaluation of the currency.

The offshore yuan was trading 1.10 percent weaker than the onshore spot at 6.4355 per dollar.

Although that is still a steep discount to the onshore spot level, the gap has closed somewhat since news of the coming forwards policy, which traders believe will reduce arbitrage opportunities between the onshore and offshore markets.

Offshore one-year non-deliverable forwards contracts, considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.602, or 3.64 percent weaker than Wednesday’s midpoint.

Reporting by the Shanghai Newsroom; Editing by Richard Borsuk

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