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Yuan eases but analysts don't see China using FX in trade war

SHANGHAI, March 23 (Reuters) - China's yuan eased against the U.S. dollar on Friday amid growing corporate demand for the greenback, but appeared little fazed for now by escalating Sino-U.S. trade tensions. Fears of a trade war between the world's two largest economies jolted China's equity, bond and commodity markets in morning trade, as increasingly heated rhetoric between the United States and China spooked investors worldwide. While China is threatening retaliatory tariffs and other measures, analysts do not believe any response would spread to its currency policy. "It is unlikely that China will use FX as a tool in response to U.S. tariff. The risk of expectations being firmed up for RMB depreciation is not desirable for China which tries to promote RMB status and assets," analysts at Westpac said in a note. However, given that the dollar tends to weaken during periods of trade tensions, the attention of China's central bank may now be shifting from curbing outflows to resisting pressure for the yuan to appreciate, OCBC said in a note on Thursday. The dollar eased against a basket of currencies on Friday as trade concerns triggered a bout of investor risk aversion.

Prior to the market opening, the People's Bank of China set the midpoint rate at 6.3272 per dollar, 105 pips or 0.17 percent weaker than the previous fix of 6.3167. In the spot market, the yuan opened at 6.3305 per dollar and was changing hands at 6.3313 at midday, 25 pips weaker than the previous late session close and 0.06 percent softer than the midpoint. If the yuan ends the late night session at the midday level, it would finish the week largely flat. Last week, the Chinese currency rose 0.1 percent versus the greenback. "Corporate flow remained the key factor deciding the yuan's movement," said a trader at a foreign bank in Shanghai. Several traders said some big Chinese banks were selling one-year dollar contracts against onshore yuan in the swap market, adding such operations could be interpreted as a "natural" reaction after the U.S. Federal Reserve raised interest rates. The one-year contract fell to a low of 780 points on Friday morning, the lowest level since September 2017. As of midday, it was traded at 835 points. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.87, weaker than the previous day's 97.02. The global dollar index fell to 89.614 from the previous close of 89.857. The offshore yuan was trading 0.01 percent weaker than the onshore spot at 6.3318 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 6.451, 1.92 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0408 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.3272 6.3167 -0.17% Spot yuan 6.3313 6.3288 -0.04% Divergence from 0.06%

midpoint*

Spot change YTD 2.77% Spot change since 2005 30.72%

revaluation

Key indexes:

Item Current Previous Change Thomson 96.87 97.02 -0.2

Reuters/HKEX CNH index

Dollar index 89.614 89.857 -0.3

*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 6.3318 -0.01% * Offshore 6.451 -1.92%

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 Kim Coghill)