Yuan nears one-month low as headwinds mount
HONG KONG, July 23 (Reuters) - The Chinese yuan held near one-month lows on Tuesday after the People's Bank of China fixed the daily midpoint weaker than market estimates, with some analysts suggesting the Chinese currency's strong performance this year may have run its course. The PBOC fixed the yuan's daily midpoint at 6.1702 on Tuesday compared to broad expectations of below 6.1695. Beijing allows the yuan to trade one percent on either side of the fixing. Expectations of yuan weakness in coming months grew after a string of weak economic data and a recent crunch in the money markets due to rare capital outflows from the mainland. "The sharp decline in carry-seeking inflows - as reflected in recent trade data - has set up the turn in the CNY trend," Deutsche Bank strategists said in a weekly note, recommending a long U.S. dollar trade versus the offshore yuan traded in Hong Kong. A Bank for International Settlements index tracking the Chinese yuan against a basket of currencies used by its trading partners adjusted for inflation is at its highest level in its 19-year history, according to Thomson Reuters data. In recent weeks, dollar/yuan has started to trade above the bottom end of its trading band after being pinned to the floor suggesting market expectations have slowly shifted towards a weaker currency. The Chinese yuan also continues to be a notable outlier in emerging market currencies, holding on to its more than one percent gains for the year even as most of its counterparts have weakened considerably in the last few weeks. That is changing. The central bank and commercial banks together sold 41.2 billion yuan ($6.7 billion) worth of foreign exchange to Chinese corporates on a net basis in June, reversing six months of net purchases, according to a Reuters calculation based on PBOC data released on Monday. Onshore dollar/yuan forwards have also begun rising reflecting further weakness though part of the reason was also due to some tightness in onshore liquidity due to dividend payments by big local banks. At above 162 pips over the spot rate, one-month forward was at its highest level this month while short-dated swaps edged higher. But a bounce in Chinese shares on Tuesday also lifted market activity in the foreign exchange market, though trading volumes continue to be near its lowest level in nearly two months. "Trading today is relatively active with buyers and sellers evenly matched. There is no clear direction in the market yet and the spot may stay in a narrow range between 6.13-6.14 in the next few days," said a trader at a Chinese bank in Shanghai.
The onshore spot yuan market at a glance:
Item Current Previous Change PBOC midpoint 6.1702 6.1721 +0.03% Spot yuan 6.1393 6.1413 +0.03%
Divergence from midpoint* -0.50% (pct)
Spot change ytd +1.48% Spot change since 2005 revaluation +34.81%
*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
The offshore yuan market at a glance:
Instrument Current Difference Offshore spot yuan 6.1358 +0.06%* Offshore non-deliverable 6.2696 -1.59%**
*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
(Additional reporting by Michelle Chen; Editing by Pete Sweeney and XXXX)