Off The Wire
Yuan slips to over 2-week low as Sino-US trade tensions mount
China's foreign ministry said on Monday that China will respond if the United States takes any new steps on trade, after President Donald Trump warned he was ready to slap tariffs on virtually all Chinese imports into the United States. On Friday, Trump said he was ready to levy additional taxes on practically all Chinese imports, threatening duties on $267 billion of goods over and above planned tariffs on $200 billion of Chinese products which are expected to be rolled out soon. Prior to the market opening on Tuesday, the People's Bank of China (PBOC) set the midpoint rate at 6.8488 per dollar, 99 pips weaker than the previous fix of 6.8389.
The official midpoint has been set at firmer-than-expected levels in recent sessions. Tuesday's fixing was 86 pips stronger than Reuters' estimate of 6.8574.
"With the resumption of direct intervention in USD/CNY fixing, much tighter capital controls and still relatively large FX reserves, we believe the PBOC is both willing and able to deliver a relatively stable USD/CNY around current levels in the near term," Lu Ting, chief China economist at Nomura, said in a note.
In the spot market, the onshore yuan opened at 6.8672 per dollar and eased to a low of 6.8741 at one point, the weakest level since Aug.24.
As of midday, it was changing hands at 6.8654, 97 pips weaker than the previous late session close and 0.24 percent softer than the midpoint.
Some traders said the market remains wary that the PBOC may act more forcefully to stem losses if the yuan falls to around 6.9 per dollar again.
At the same time, market participants are cautious about the dollar's moves, as major currencies could be affected by negotiations on Britain's exit from the European Union. The offshore yuan also weakened on Tuesday, but losses were to be capped by liquidity tightness. It was trading at 6.8749 per dollar as of midday.
Large state-run Chinese banks continued to swap dollars for yuan in the offshore forward markets, sopping up yuan supply. As a result, Hong Kong's overnight yuan borrowing cost rose for a fourth straight day on Tuesday.
The state banks were seen swapping dollars for yuan in tenors ranging from one-month to one year. These operations, which traders said have persisted for over a week, effectively tighten offshore yuan liquidity and raise the cost of shorting the Chinese currency. The one-year tenor of the dollar/yuan swap offshore rose to a high of 937.23 points, the highest level since June 22.
The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), set by the city's Treasury Markets Association (TMA), was fixed at 4.00000 percent for overnight contracts on Tuesday, the highest level since June 19.
Some traders expect such big bank operations in the offshore forwards is likely to persist in the near term.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.37, weaker than the previous day's 93.49.
The global dollar index fell to 95.149 from the previous close of 95.15.
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 6.963, 1.64 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0415 GMT:
Item Current Previous Change
PBOC midpoint 6.8488 6.8389 -0.14% Spot yuan 6.8654 6.8557 -0.14% Divergence from 0.24%
Spot change YTD -5.22% Spot change since 2005 20.55% revaluation
Item Current Previous Change
Thomson 93.37 93.49 -0.1 Reuters/HKEX
Dollar index 95.149 95.15 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
OFFSHORE CNH MARKET
Instrument Current Difference from onshore Offshore spot yuan 6.8749 -0.14%
Offshore 6.963 -1.64% non-deliverable
*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 Andrew Galbraith; Editing by Kim Coghill)