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China's c.bank keeps yuan on tight rein as trade war worries weigh

SHANGHAI, June 12 (Reuters) - China's yuan eased on Wednesday as U.S. President Donald Trump heightened fears of a protracted trade by pushing China to give ground in negotiations, but the currency's declines were limited by China's central bank setting an almost unchanged daily fix. Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.8932 per dollar, just 2 pips weaker than Tuesday's fix of 6.8930. In the spot market, onshore yuan opened at 6.9100 per dollar and was changing hands at 6.9162 at midday, 50 pips weaker than the previous late session close and 0.33 percent softer than the midpoint. The pattern of stronger-than-expected fixes has demonstrated the PBOC's unwillingness to see volatility in the yuan, despite Governor Yi Gang saying there is no red line for the exchange rate. "I think they need a catalyst to let it go," said Tommy Xie, head of Greater China research at OCBC Bank in Singapore. "In the near term, market will continue to watch out for the fixing. Once (USD/CNY) fixing is set above 6.90, it could be a sign," he said, adding the timing could happen after the G20 summit in Japan in late June, when Trump is expected to meet China's President Xi Jinping. Trump said on Tuesday that he was holding up a trade deal with China and had no interest in moving ahead unless Beijing agrees again to four or five "major points," without elaborating on what those points were. Trump's tough talk fueled bearish sentiment toward the yuan, but for now several currency traders said they expected to see the onshore spot rate consolidate at current levels going into the G20 summit. Until then, they doubted whether Beijing would allow the yuan to breach 7 per dollar, a level last seen during the global financial crisis. Goldman Sachs, however, made a downward revision to its forecast for the yuan, expecting it to weaken past 7 per dollar in three months. The investment bank now expects the yuan to trade at 7.05, 6.95 and 6.80 in three, six and 12 months, compared with 6.95, 6.65 and 6.65, respectively, in the previous forecast. "Some currency depreciation is a natural offset to the increase in tariffs that appears likely, but further depreciation is likely to take USD/CNY close to the psychologically important level of 7.00 that policymakers have been reluctant to breach, lest it damage onshore sentiment and spark capital outflows," Goldman Sachs said in a note. Separately, China's central bank said on Tuesday it will sell yuan-denominated bills in Hong Kong in late June, in a move some market analysts believe was aimed at preventing the yuan currency from declining further. Several market participants said state-owned Chinese banks were draining yuan liquidity in Hong Kong last week, which pushed up the cost of borrowing and shorting the yuan in the city. Signs of tightness have pushed Hong Kong's overnight yuan borrowing rate up. The overnight rate was fixed at 3.13200% on Wednesday, the highest level since Nov.23, 2018. The global dollar index rose to 96.691 at midday from the previous close of 96.686. The offshore yuan was trading at 6.9266 per dollar as of midday.

The yuan market at 0428 GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 6.8932 6.893 0.00%Spot yuan 6.9162 6.9112 -0.07%Divergence from 0.33%

midpoint*

Spot change YTD -0.62%Spot change since 2005 19.67%

revaluation

Key indexes:

Item Current Previous ChangeThomson 93.14 93.11 0.0

Reuters/HKEX CNH index

Dollar index 96.691 96.686 0.0

*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 6.9266 -0.15%*Offshore 6.9865 -1.34%

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 Simon Cameron-Moore)