China's yuan edges down; investors bet on further weakness

SHANGHAI, Oct 17 (Reuters) - China's yuan weakened on Wednesday, shrugging off a stronger midpoint fixing from the country's central bank, as the dollar steadied from overnight losses and as market indicators backed investor views of continued yuan weakness over coming months. Slowing economic growth in the world's second-biggest economy and expectations of further easing in monetary conditions have strengthened bearish views on the yuan, which has slipped about 6 percent against the dollar this year. The dollar was trading 0.14 percent higher at 95.183, having fallen to more than two-week lows on Tuesday as U.S. equity markets surged on encouraging earnings data that whetted investor appetite for risk. Reflecting the previous session's losses in the greenback, the People's Bank of China (PBOC) set the daily midpoint for the yuan's trading band at 6.9103 per dollar, the second consecutive day of firmer fixings after a 10-day streak of weakening. But after opening higher at 6.9148, spot yuan was changing hands at 6.9230 at 0409 GMT, 38 pips weaker than the previous day's close. A trader at a regional bank in Shanghai said the fall in the yuan on Wednesday underscored the absence of any major change in market momentum. "Relatively strong demand is pushing the dollar higher. While the dollar index fell a bit overnight, generally speaking it's still around the 95 level. The drop wasn't that significant," he said. A weakening yuan has raised eyebrows in Washington, with some U.S. officials expressing concern about the depreciating currency. U.S. President Donald Trump has frequently accused China of cheapening its currency to gain a trade advantage, claims Beijing has consistently rejected. The U.S. Treasury is due to release a key currency report this week, though China is not expected to be named a currency manipulator. On Wednesday, a former advisor to the PBOC was quoted in state media as saying claims that China was actively pursuing a weaker yuan were "total rubbish." Yet, amid a worsening Sino-U.S. trade war, investors continue to bet on a weaker currency over the next 12 months, potentially breaching the 7 yuan per dollar level, which is widely seen as having psychological significance. "Slower economic growth, monetary easing and escalating trade tensions will all put the renminbi under pressure in the months ahead," Capital Economics economists said in a note. "The People's Bank will continue to lean in the other direction but, with capital outflows under control, we now think policymakers will allow the currency to weaken further." On Wednesday, market data continued to point to a weaker yuan. One-year non-deliverable forwards contracts (NDFs), seen as the best indicator of the market's outlook for the yuan, traded at 7.0009, suggesting that the currency is expected to fall by about 1.1 percent from current levels against the dollar. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 92.61, down from 92.65 on Tuesday. The offshore yuan edged up 0.1 percent to 6.9200 per dollar in tepid trade, with Hong Kong's financial markets closed for a holiday.

The yuan market at 4:09AM GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.9103 6.9119 0.02% Spot yuan 6.923 6.9192 -0.05% Divergence from 0.18%

midpoint*

Spot change YTD -6.01% Spot change since 2005 19.55%

revaluation

Key indexes:

Item Current Previous Change Thomson 92.61 92.65 -0.1

Reuters/HKEX CNH index

Dollar index 95.177 95.048 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 6.92 0.04% * Offshore 7.0009 -1.29%

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 Andrew Galbraith Editing by Shri Navaratnam)