SHANGHAI China's yuan weakened against the dollar on Friday and is on course for a second straight weekly loss due to a rising dollar in global markets on growing expectations of a U.S. Federal Reserve interest rate hike next week.
The People's Bank of China set the midpoint rate at 6.9123 per dollar prior to market open, firmer than the previous fix of 6.9125.
The spot market opened at 6.9116 per dollar and was changing hands at 6.9123 at midday, 53 pips weaker than the previous late session close and unchanged from the midpoint.
For the week, the yuan is set to fall around 0.2 percent against the dollar, booking a second straight weekly loss.
Traders said the domestic market was "balanced" on Friday morning, but attributed the recent volatility in the Chinese unit to expectations of a March Fed rate hike, which most market participants had thought was unlikely to happen earlier.
"Some companies were still buying dollars today, while some market participants were selling the greenback to lock in profits," said a Shanghai-based trader at a Chinese bank.
The market became very cautious following an "unreasonable" rise in the offshore yuan on Thursday afternoon, the trader added.
The offshore yuan firmed around 0.2 percent to the dollar a day earlier by closing at 6.9031, after hitting a high of 6.9313. The surge in the offshore spot has dampened the onshore market, traders said.
On Friday, the offshore spot was trading 0.09 percent firmer than the onshore spot at 6.9062 per dollar by midday.
The Chinese yuan was little affected by the volatility in South Korea's won, traders said, after the Constitutional Court upheld the impeachment of President Park Geun-hye, instantly removing her from office.
Separately, People's Bank of China Governor Zhou Xiaochuan said on Friday that he expects the yuan exchange rate to be stable this year, adding fluctuations are normal.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.35, weaker than the previous day's 95.37.
The global dollar index rose to 101.91 from the previous close of 101.85.
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 7.1485, 3.30 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0405 GMT:
Item Current Previous Change
PBOC midpoint 6.9123 6.9125 0.00%
Spot yuan 6.9123 6.907 -0.08%
Divergence from 0.00%
Spot change YTD 0.50%
Spot change since 2005 19.74%
Item Current Previous Change
Thomson 95.35 95.37 0.0
Dollar index 101.91 101.85 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
Offshore spot yuan * 6.9062 0.09%
Offshore 7.1485 -3.30%
*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 Sunil Nair)