Yuan slips in new sign recent appreciation trend is over
* Dollar/yuan forwards high on yuan money market squeeze
* Yuan is down 0.2 pct since June 3
* Narrow movements expected in coming weeks
* China's tolerance for yuan appreciation near limit -traders
SHANGHAI, June 21 (Reuters) - China's yuan fell slightly against the dollar on Friday, continuing a generally weakening trend that traders said appears to show that a round of appreciation which covered much of April and May is over. Spot yuan changed hands at 6.1328 versus the dollar at midday, down 0.08 percent from Thursday's close after the People's Bank of China (PBOC) fixed a weaker official midpoint of 6.1766, compared with Thursday's 6.1698. The PBOC has guided the yuan to fall slowly but steadily by a total of 0.2 percent since the currency hit a record high of 6.1210 on May 27 and again on June 3. The weaker guidance on Friday came after the central bank guided the yuan stronger from early April to late May, ahead of a slew of major political events, including a G20 meeting and Chinese President Xi Jinping's visit to the United States. The period of appreciation had sparked widespread speculation on why the authorities would let the yuan appreciate at a time China's exports were relatively weak. A prevailing theory at the time was that China was more determined to reform its rigid exchange rate system as it eyed a healthier economic structure less reliant on exports. "The recent weakening of the yuan has betrayed the limit of the Chinese government's commitment to a stronger currency, and politics played a role in yuan's appreciation in April and May," said a trader at a Chinese commercial bank in Shanghai. "As there are no major political events right ahead, the yuan is likely to remain in a tight range around 6.13 against the dollar in coming weeks," he said. In another development, a severe domestic money market squeeze has forced some currency market players to use foreign exchange forwards to help supply yuan funding. One-year dollar/yuan forwards recorded a two-month high of 6.2971 at the peak of the squeeze on Thursday, jumping 555 pips from its recent low of 6.2416 on May 27. Those forwards dropped slightly but remained at a high level of 6.2708 at midday on Friday as the crunch eased but was not over.
The onshore spot yuan market at a glance:
Item Current Previous Change (pct) PBOC midpoint 6.1766 6.1698 -0.11 Spot yuan 6.1328 6.1282 -0.08
Divergence from midpoint* -0.71 (pct)
Spot change ytd +1.59 Spot change since 2005 revaluation +34.95
*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 1 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET Dollar/yuan non-deliverable forwards (NDFs) stabilised on Friday after surging on Thursday to imply yuan depreciation in the long term, as a preliminary survey showed Chinese factory activity weakened to a nine-month low. The latest sign of a slowdown in the Chinese economy raised expectations that onshore spot yuan may weaken over the next year, traders said.
The offshore yuan market at a glance:
Instrument Current Difference from onshore
Offshore spot yuan 6.1318 +0.02* Offshore non-deliverable 6.2965 -1.94**
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> RECENT DEVELOPMENTS - Yuan rally starts to fade as capital inflows to China slow
- ANALYSIS-Bullish yuan herd leaves China fundamentals in the dust - Currency war or no, Beijing doesn't want Asia to take stable yuan for granted - China opens new front in money war as yuan speculation distorts export data
KEY DATA POINTS - Gap between PBOC midpoint and spot rate is narrowing. GRAPHIC: http://link.reuters.com/qyx74t - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate FX purchases in May show reduction in yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money inflows turn to outflows in May GRAPHIC: http://link.reuters.com/saz74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t
(Editing by Richard Borsuk)