China's yuan weakens after US dollar gains, sharply lower midpoint fixing

SHANGHAI, June 16 (Reuters) - China's yuan fell against the U.S. dollar on Friday and was on track for its worst week since March, after the central bank fixed its official guidance sharply lower than the previous day. Prior to the market opening on Friday, the People's Bank of China set the midpoint rate at 6.7995 per dollar, the weakest level since June 2, reacting to strength in the greenback overnight in global markets. On Thursday morning, shortly after the Federal Reserve raised U.S. interest rates, the PBOC set the midpoint fixing at 6.7852 per dollar, the strongest level in more than seven months. In Friday trading, the onshore spot yuan opened at 6.8042 per dollar and was changing hands at 6.8144 at midday, 44 pips weaker than the previous late session close and 0.22 percent softer than the day's midpoint. For the week, the yuan was down 0.26 percent against the dollar. If that remains the case at the end of Friday, this week will be the yuan's worst since the one that ended on March 3. The global dollar index, which measures its strength against six other currencies, rose to a more than two week high to 97.507 on Friday, after upbeat U.S. economic data that could allow the Fed raise interest rates again this year. After the Fed hiked its key policy rates a quarter percentage point as expected on Wednesday, the Chinese central bank stood pat on short-term interest rates. When the Fed raised rates in March, the PBOC did so too, within hours. Traders said dollar demand climbed in Friday morning trade as the bank clients worried that the yuan could weaken further. June is a traditional peak period for corporate dollar demand, they said. One trader at a Chinese bank in Shanghai said some market participants may start to liquidate and sell dollars to lock in profits if the spot rate continued to ease and moved close to 6.85 per dollar. Market watchers, noting that China's foreign exchange reserves had booked four straight months of expansion, said they would like to have a better picture of capital flows judging from commercial banks' forex sales and purchases data. The foreign exchange regulator is due to release the May data later on Friday. Separately, a Reuters poll of 16 analysts, traders and fund managers showed that investors raised their Chinese yuan bullish bets from two weeks ago to the largest since late 2014, after Chinese authorities began tightening control of the currency in recent weeks to guard against outflow risk. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.28, firmer than the previous day's 94.25. The offshore yuan was trading 0.12 percent weaker than the onshore spot, at 6.8229 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 6.9995, or 2.86 percent away from the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0359 GMT:


Item Current Previous Change PBOC midpoint 6.7995 6.7852 -0.21% Spot yuan 6.8144 6.81 -0.06% Divergence from 0.22%


Spot change YTD 1.94% Spot change since 2005 21.46%


Key indexes:

Item Current Previous Change Thomson 94.28 94.25 0.0

Reuters/HKEX CNH index

Dollar index 97.507 97.433 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 6.8229 -0.12% * Offshore 6.9995 -2.86%

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)