China's yuan weakens on strong corporate demand for dollars

SHANGHAI, May 23 (Reuters) - China's yuan weakened against the U.S. dollar on Tuesday, dragged down by strong corporate dollar purchases. Traders said there was no impact from the suspected terrorist attack in the English city of Manchester. Prior to the market opening, the People's Bank of China set the midpoint rate at 6.8661 yuan per dollar, firmer than the previous fix of 6.8673. Tuesday's fixing, like those made in recent weeks, was stronger than the market expected. A trader at a Chinese bank in Shanghai speculated that authorities may want to use a firmer guidance to "suppress the (USD/CNY) rate from testing higher" as corporate demand for the U.S. currency has been high. In the run-up to June 30, both foreign and domestic companies traditionally have increased demand for dollars. Foreign firms usually start to repatriate profits overseas and the domestic ones begin to purchase dollars to square their books when the quarter-end is approaching. In the spot market on Tuesday, the yuan CNY=CFXS> opened at 6.8862 per dollar and was changing hands at 6.8900 at midday, 8 pips weaker than the previous late session close and 0.35 percent softer than the midpoint. "The correlation between the official guidance and the transaction prices has been getting weak recently," said another Shanghai-based trader, noting the yuan's spot rate has not been firming as the midpoint settings would suggest it has. Tuesday's midpoint pulled the index for the yuan's value based on a trade-weighed basket to 92.14 from 92.29 a day earlier, its lowest since the measure was inaugurated in late 2015, according to Reuters calculations based on official data from the China Foreign Exchange Trade System (CFETS). The CFETS publishes index figures on a weekly basis. The loss in the CFETS index continued to "sync up with the DXY (global dollar index)," OCBC Bank said in a note. The global dollar index fell to 96.939 from the previous close of 96.984. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.19, weaker than the previous day's 93.32. The offshore yuan was trading 0.14 percent firmer than the onshore spot at 6.8806 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 7.0635, 2.79 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0401 GMT:


Item Current Previous Change PBOC midpoint 6.8661 6.8673 0.02% Spot yuan 6.89 6.8892 -0.01% Divergence from 0.35%


Spot change YTD 0.82% Spot change since 2005 20.12%


Key indexes:

Item Current Previous Change Thomson 93.19 93.32 -0.2

Reuters/HKEX CNH index

Dollar index 96.939 96.984 -0.1

*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.


Instrument Current Difference

from onshore

Offshore spot yuan 6.8806 0.14% * Offshore 7.0635 -2.79%

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. .

(Reporting by Winni Zhou and John Ruwitch; Editing by Richard Borsuk)