SHANGHAI China's yuan weakened slightly against the dollar on Wednesday, but interbank money rates surged after the central bank drained funds for a third straight day in a further sign of policy tightening.
The People's Bank of China set the midpoint at 6.8632 per dollar prior to the market open, firmer than the previous fix of 6.8806.
Traders said the midpoint largely matched what their models had suggested, as a rise in the U.S. dollar in global markets was offset by losses in the Korean won, which accounts for around 10.77 percent of China's currency basket, measuring the renminbi's value against those of its trading partners.
The dollar gained support after the U.S. Federal Reserve Chair Janet Yellen told the U.S. Senate Banking Committee on Tuesday that the Fed would likely need to raise interest rates at one of its upcoming meetings. However, she expressed caution amid considerable uncertainty over economic policy under the Trump administration.
Spot yuan opened at 6.8680 per dollar and was changing hands at 6.8665 at midday, 5 pips softer than the previous late session close and 0.05 percent weaker than the midpoint.
"Many market participants were selling dollars in the market, with more traders unwilling to hold short yuan positions for a longer period of time," said a Shanghai-based dealer at a Chinese bank.
The dealer added there may have been official window guidance triggering dollar sales at some companies and banks, after the greenback rose overnight.
The spread between onshore and offshore yuan widened slightly on Wednesday to 125 pips. Offshore yuan was trading 0.18 percent firmer than onshore at 6.8540 per dollar.
The global dollar index, a gauge of dollar strength against six other currencies, stood at 101.18 by midday, compared with the previous close at 101.25. It hit a 3-1/2-week high of 101.38 at one point overnight.
In the money market, key short-term money rates rose sharply after the central bank drained funds via open market operations, although it also injected funds through a medium-term lending facility, with longer-term rates unchanged.
The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was 2.7902 percent at midday, nearly 27 basis points higher than the previous day's closing average rate.
The PBOC injected 120 billion yuan ($17.49 billion) through reverse repos on Wednesday morning, while 260 billion yuan of such repos was set to mature. The central bank has drained a net 330 billion yuan so far this week, and an additional 220 billion yuan of reverse repos are due to come due this week. [CN/MMT]
On MLF loans, one batch with a total value of 151.5 billion yuan ($22.08 billion) was set to mature on Wednesday. Another batch of 53.5 billion yuan would expire on Sunday, according to Reuters calculations based on official data.
But the market was still anxiously looking for clues as to whether the central bank would roll over its temporary liquidity facility (TLF).
The TLF loans are due to mature on Friday. The TLF was introduced by the central bank in mid-January to help keep major commercial banks flush with funds.
Some market participants said the TLF had added around 600 billion yuan in liquidity.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.43, firmer than the previous day's 95.13.
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 7.071, 2.94 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0346 GMT:
Item Current Previous Change
PBOC midpoint 6.8632 6.8806 0.25%
Spot yuan 6.8665 6.866 -0.01%
Divergence from 0.05%
Spot change YTD 1.17%
Spot change since 2005 20.53%
Item Current Previous Change
Thomson 95.43 95.13 0.3
Dollar index 101.18 101.25 -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 * 6.854 0.18%
Offshore 7.071 -2.94%
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint..
($1 = 6.8630 Chinese yuan )
(Reporting by Winni Zhou and John Ruwitch; Editing by Jacqueline Wong)