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Yuan eases on weaker fixing, not yet affected by escalating trade tensions

SHANGHAI, April 4 (Reuters) - China's yuan eased against the U.S. dollar on Wednesday after the central bank set a weakened official guidance rate, while the market does not yet appear to have been affected by escalating trade tensions between the world's two largest economic powers. Traders said market sentiment on Wednesday morning was not been influenced by news that the Trump administration raised the stakes in a growing trade dispute with China, announcing 25 percent tariffs on some 1,300 industrial technology, transport and medical products in an attempt to force changes in Beijing's intellectual property practices. China quickly responded that it would soon take measures of equal intensity and scale against U.S. goods. The dollar eased against the safe haven yen but remained largely stable against its major trading partners on Wednesday morning on worries over escalating trade tensions. Prior to market opening, the People's Bank of China set the midpoint rate at 6.2926 per dollar, 93 pips or 0.15 percent weaker than the previous fix of 6.2833. In the spot market, the onshore yuan opened at 6.2895 per dollar and was changing hands at 6.2911 at midday, 51 pips weaker than the previous late session close. If the yuan finishes the late night session at the midday level, it would have lost 0.26 percent to the dollar in a holiday-shortened week. It would be the first weekly loss since mid-February. A trader at a Chinese bank said given the global dollar index was swinging around 90 level in recent sessions, the yuan lacked momentum to breach the current range. The global dollar index, a gauge that measures the unit's strength against six other currencies stood at 90.08 as of midday, compared with the previous close of 90.2. Some traders said investors were unwilling to figure out a clear direction in the yuan before the holiday and expected the yuan to trade between 6.25 and 6.3 per dollar in the near term. Traders were not holding large positions for their proprietary trades ahead of China's tomb-sweeping festival Qingming, for which markets will be closed on Thursday and Friday. Although the spot yuan rate has not reacted to the rising trade tensions between the United States and China, some analysts said China might lose the most if a major trade war breaks out. "We continue to expect China will avoid escalating the rift (for now) and adopt processes (lip service or otherwise) to address U.S. concerns, including allowing for yuan strength," Sue Trinh, head of Asia EMFX strategy at Royal Bank of Canada in Hong Kong said in a note on Wednesday. "As such, we doubt the worst case trade war scenario will be unfolding just yet." The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 97.63, firmer than the previous day's 97.59. The offshore yuan was trading 0.14 percent stronger than the onshore spot at 6.2825 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 6.376, 1.31 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0436 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.2926 6.2833 -0.15% Spot yuan 6.2911 6.286 -0.08% Divergence from -0.02%

midpoint*

Spot change YTD 3.43% Spot change since 2005 31.56%

revaluation

Key indexes:

Item Current Previous Change Thomson 97.63 97.59 0.0

Reuters/HKEX CNH index

Dollar index 90.08 90.2 -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 6.2825 0.14% * Offshore 6.376 -1.31%

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 David Stanway)