China's yuan set for best week in more than a year
HONG KONG, Oct 18 (Reuters) - China's yuan hit a record high for a fifth consecutive day against the struggling U.S. dollar on Friday as investors worried about the economic impact of a long shutdown in the world's biggest economy. In contrast to the U.S. economic woes, latest data showed the Chinese economy expanded at a robust 7.8 percent in the third quarter, signaling policymakers may have averted a sharp slowdown for now. The strong data put the Chinese currency on track for its best weekly winning streak since February 2012 even as the dollar index hovered near an eight-month low. of 6.0915 per dollar before pulling back slightly, compared to a close of 6.0982 on Thursday. It has hit a record in each session this week. Chart: http://link.reuters.com/geg83v Driving the yuan's chunky 0.4 percent gains this week against the dollar has been the noticeable absence of state-run banks from the foreign exchange market who usually buy dollars for the central bank. Their heavy dollar purchases had kept the yuan in a tight range since August and boosted reserves. China's foreign currency reserves exploded by upward of $163 billion in the third quarter of 2013, the largest absolute increase on record and the biggest percentage rise since February 2007. The increase reflects market intervention by the central bank to keep the yuan from rising too quickly, which could attract more speculative inflows. UBS strategists say the third quarter reserves growth was fully restricted to September and most likely after the Fed's policy decision, which caught global markets wrong footed who were expecting a tapering in its easy monetary policy. As Beijing kept an iron-clad grip on the spot market, investors and banks took to the currency forwards market to bet on a stronger yuan causing a sharp rally in that space. One-year onshore yuan forward points collapsed by more than 400 pips to below 200 pips in four trading sessions while one-year offshore yuan forward points hit a new record earlier this week. That forced the People's Bank of China (PBOC) to relax its stance and let the yuan appreciate in the spot market. central bank may also be preventing a likely dollar shortage that may occur down the road thanks to its massive purchases in the foreign exchange market, traders said. But the yuan's rally may be coming to an end as forward points have started to settle and the central bank is quietly draining excess funds from the money market, indicating it is in no mood to start relaxing its policy despite heavy inflows. Maturing central bank bond repurchase agreements will drain a net 58 billion yuan ($9.50 billion) from China's money markets next week. The PBOC has injected a total of 170.7 billion yuan via open market operations so far this year. "We are cautiously buying dollar/China at these levels," said a trader at a U.S. bank in Hong Kong.
The onshore spot yuan market at a glance:
Item Current Previous Change PBOC midpoint 6.1372 6.1431 0.10% Spot yuan 6.0928 6.0982 0.09%
Divergence from midpoint* -0.72%
Spot change ytd 2.26% Spot change since 2005 revaluation 35.84% *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 Spot yuan in Hong Kong CNH=D3 stabilized near a record low above 6.08 per dollar while three-month yuan non-deliverable forwards held above the 6.129 line.
The offshore yuan market at a glance:
Instrument Current Difference from onshore Offshore spot yuan 6.0882 0.08% Offshore non-deliverable 6.151 -0.22%
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
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)