China's yuan rises for second month, but rally seen stalling
HONG KONG, Aug 30 (Reuters) - China's yuan held at one-week highs against the U.S. dollar on Friday but signs are emerging that the current phase of the currency's rally is coming to a close. As trading activity picks up from next week after the summer lull, investors are braced for a fresh wave of outflows from emerging economies in Asia which may hit the Chinese market. August has been characterised by sharp drops in some currencies in Asia, but the moves have been largely driven by domestic factors, notably increased corporate hedging in the Indian rupee as the currency tanked to record lows, for example. That is in sharp contrast to the Chinese yuan where inflows have cautiously resumed this month, and recent data such as HSBC's initial survey of purchasing managers showed manufacturing activity grew at its quickest pace in four months in August. But with the tapering of the U.S. Federal Reserve's quantitative policies looming and rising unrest in the Middle East, Asian currency markets could face a period of renewed weakness. "September will bring welcome liquidity, but this will more likely be used by offshore investors to exit," Deutsche Bank analysts said in a weekly note. On Friday, the Chinese yuan lurked at 6.1205 versus the dollar, unchanged from Thursday's close. It is set for a second consecutive monthly rise against the dollar, a notable performance given the sell-off in emerging markets and despite the People's Bank of China setting a weaker midpoint fixing for a second day. But signs are rife in the onshore and the offshore markets that investors are bracing for a weaker yuan. In the onshore forwards market, one-year dollar/yuan forwards rose for the third consecutive day as some banks covered their short positions against the U.S. dollar as overnight funding costs rose. That rise in onshore forwards rippled into the offshore market with dollar/yuan forwards traded in Hong Kong pushing higher. But a sharp decline in Chinese asset prices is unlikely as money managers are becoming more optimistic about the outlook on the economy. Fund managers raised their suggested equity holdings to a seven-month high in August on signs of a stabilisation in the economy and expectations that a key Communist Party meeting in November will likely set the pace for faster growth, a Reuters poll showed on Friday.
The onshore spot yuan market at a glance:
Item Current Previous Change PBOC midpoint 6.1709 6.169 -0.03% Spot yuan 6.1205 6.1205 0.00%
Divergence from midpoint* -0.82%
Spot change ytd 1.79% Spot change since 2005 revaluation 35.23% *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 For the latest CNH Tracker, see: http://link.reuters.com/dyf72v
The offshore yuan market at a glance:
Instrument Current Difference from onshore Offshore spot yuan 6.1165 0.07% Offshore non-deliverable 6.2368 -1.06%
*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 Jacqueline Wong)