October 10, 2016 / 3:17 AM / 10 months ago

China's yuan sinks to six-year low, then erases losses

Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016.Kim Kyung-Hoon/File Photo

SHANGHAI (Reuters) - China's yuan fell to its lowest level in six years early Monday, breaching a key psychological threshold, before erasing the losses on the first day of trading after a week-long holiday.

Traders said the weakening of the yuan CNY=CFXS reflected strength in the dollar last week, and they did not see any signs of intervention by state banks to support the yuan after it fell.

In mid-July, when the yuan last breached the 6.7 mark, state banks intervened heavily.

Some China watchers have wondered if any signs of yuan weakness following the holiday would signal that Beijing was putting the currency back on a slow depreciation path after holding it steady through September. The currency fell after the People's Bank of China set the midpoint CNY=PBOC at 6.7008 yuan per dollar, its weakest fix since September 2010 and about 0.3 percent weaker than the setting on Sept. 30, before a one-week National Day holiday.

The spot market opened at 6.6904 per dollar, quickly fell below the key 6.7 level for the first time since July and traded as low as 6.7051, the weakest rate since September 2010.

Then it began to pare losses, and at 0403 GMT was changing hands at 6.6991, or 246 pips weaker than the Sept. 30 late session close and 0.03 percent firmer than that day's midpoint.

A trader at a foreign bank in Shanghai said the market "is actually quite calm now as the willingness to purchase the dollar is not strong. And the yuan has been pulled back to around 6.7 level after some investors sold the greenback after the yuan hit 6.7050 as they were afraid the central bank would soon step into the market to stabilize."

"The market is holding a wait-and-see approach towards the central bank attitude," he added.

Another trader at a European bank in Shanghai said "so far we haven't seen any central bank actions", though he added that it's possible the yuan could soon breach the 6.75 level "if the central bank does not show up at all"."

A 100 Yuan note is seen in this illustration picture in Beijing March 7, 2011.David Gray/File Photo

Late last week, the central bank announced that its foreign exchange reserves dropped for a third month in September, by more than expected, suggesting fresh capital outflows from the world's second-largest economy.

STRENGTHENING DOLLAR

Pressure has also risen on the yuan recently as the U.S. dollar has strengthened in global markets, most recently on the back of strong labor market data that supports a possible U.S. interest rate hike later this year.

A trader at a Chinese bank said the central bank may have loosened its grip at the 6.7 per dollar level after the yuan's Oct. 1 official inclusion into the International Monetary Fund's reserve basket, known as Special Drawing Rights (SDR).

"We will have to see what the next threshold is," the trader added.

On Friday, the offshore yuan CNH= slumped to its lowest rate against the dollar since Jan. 7. Offshore yuan mostly trades in Hong Kong and is not bound by the Chinese central bank's tight trading restrictions.

Hong Kong markets are closed Monday for a holiday.

In the weeks before onshore markets closed for China's long holiday, the spot rate flirted with 6.7. The last close was at 6.6745.

On Oct. 6, a Reuters poll of more than 70 foreign exchanges strategists showed they expected the yuan to fall another 3 percent by next September.

Reporting by John Ruwitch and Winni Zhou; Editing by Richard Borsuk

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