Yuan falls despite state bank support on 2017’s first day of trading

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Hong Kong, January 3
China’s yuan weakened against the U.S. dollar on Tuesday, in spite of state bank support for the Chinese currency, as the greenback held firm on the prospect of more U.S. interest rate hikes in the new year. Traders say that keeping the yuan stable will remain a priority for the Chinese central bank this year. This is reflected in Tuesday’s stronger-than-expected midpoint setting and state banks’ support in the market, they say. The People’s Bank of China set the midpoint rate at 6.9498 per dollar prior to market open, weaker than the previous fix of 6.937. It was stronger than the 6.96 area that many traders had expected. The spot market opened at 6.9540 per dollar and was changing hands at 6.9547 at midday, 80 pips weaker than the previous late session close and 0.07 percent weaker than the midpoint. The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day. “The yuan fixing was stronger than our expectation which shows that stabilisation will be the main theme throughout the year, while big slump of the yuan at the beginning of last year will not happen again,” said a trader at a Chinese bank in Shanghai. In 2016, the yuan weakened 6.63 percent against the dollar, its biggest move since 1994. China’s economic growth could slow to 6.5 percent this year from about 6.7 percent in 2016, a government-run think tank said on Tuesday. , while suggesting a one-off devaluation could help stabilise the yuan currency. Authorities should increase the role of the market in formation of the yuan exchange rate , increase the currency’s flexibility “and even conduct a one-off devaluation of the renminbi, and thereby maintain renminbi stability at a balanced level”, it said in an article in the Shanghai Securities News.. China’s last one-off currency devaluation, a 2 percent move in August 2015, shocked global markets and was widely viewed by traders and economists as a failure. With the yuan still weakening and capital outflows steadily eroding China’s forex reserves, pundits have discussed the possibility of a second devaluation, but there has been little indication that policymakers were considering such a move. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.73, firmer than the previous day’s 95.59. The global dollar index rose to 102.66 from the previous close of 102.21. “Demand to buy dollars is still strong, but state banks are offering dollars in the market to support the yuan,” said another trader in Shanghai. The offshore yuan was trading -0.18 percent weaker than the onshore spot at 6.9675 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 7.298, or -4.77 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate. The yuan market at 3:50AM GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.9498 6.937 -0.18% Spot yuan 6.9547 6.9467 -0.12% Divergence from 0.07% midpoint* Spot change YTD -6.63% Spot change since 2005 19.01% revaluation Key indexes: Item Current Previous Change Thomson 95.73 95.59 0.1 Reuters/HKEX CNH index Dollar index 102.66 102.21 0.4 *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.9675 -0.18% * Offshore 7.298 -4.77% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint. .

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