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China's yuan weakens on rising corporate dollar demand

SHANGHAI, July 26 (Reuters) - China's yuan eased against the dollar on Wednesday due to rising corporate demand for the greenback, while the market awaited the U.S. Federal Reserve's outlook on monetary tightening. Prior to market opening, the People's Bank of China lowered the midpoint rate to 6.7529 per dollar, the weakest level since July 18, 44 pips or 0.07 percent softer than the previous fix of 6.7485. In the spot market, the yuan opened at 6.7550 per dollar and was changing hands at 6.7555 at midday, 35 pips weaker than the previous late session close and 0.04 percent softer than the midpoint. "The yuan faced some resistance around 6.75 per dollar, at which companies increased their dollar purchases to prevent the Chinese currency from rising," said a trader at a Chinese bank in Shanghai, noting some Hong Kong-listed mainland Chinese companies were purchasing dollars to pay dividends to their overseas shareholders in morning trade. Traders said yuan trade was taking its cue from the dollar's movements, with most participants awaiting direction from the Fed's two-day policy meeting later in the global day. The Fed is widely expected to keep interest rates unchanged but investors will look for clues on when it may raise rates again this year and begin paring its massive bond portfolio. Analysts expect both the onshore and onshore spot yuan to remain steady in the 6.75 to 6.76 per dollar range. "PBOC should be comfortable with the current RMB exchange rate ranging 6.70 to 6.80, and any CNH liquidity squeeze and FX intervention look unlikely at this moment," Ken Cheung, Asian FX strategist at Mizuho Bank in Hong Kong wrote in a note. Meanwhile, the securities regulator pledged on Wednesday to expand access to China's capital markets for all types of investors, in a further step forward toward more financial market openness. The offshore yuan was trading 0.01 percent firmer than the onshore spot at 6.7545 per dollar. Several traders said they had not seen major state-owned banks selling dollars in the onshore market on Wednesday morning, with some suspecting that the authorities may have slightly loosened their tight grip on the currency recently. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.88, firmer than the previous day's 93.77. The global dollar index rose to 94.107 from the previous close of 94.054. 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 6.8795, 1.84 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0407 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.7529 6.7485 -0.07% Spot yuan 6.7555 6.752 -0.05% Divergence from 0.04%

midpoint*

Spot change YTD 2.83% Spot change since 2005 22.51%

revaluation

Key indexes:

Item Current Previous Change Thomson 93.88 93.77 0.1

Reuters/HKEX CNH index

Dollar index 94.107 94.054 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.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.7545 0.01% * Offshore 6.8795 -1.84%

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)