August 27, 2018 / 3:37 AM / 3 months ago

Yuan at 2-1/2 week high as China signals support, revives fix factor

 (Adds details and comments)
    SHANGHAI, Aug 27 (Reuters) - The yuan hovered at a
2-1/2-week high to the dollar on Monday after China's central
bank revived a "counter-cyclical factor" in its daily fixing to
support the currency, arresting a record 10-week slide that has
rattled global markets and irritated Washington.
    The announcement was seen as the latest signal from the
People's Bank of China (PBOC) that is not comfortable with
further depreciation in the yuan which could spark capital
outflows from the cooling economy.
    The move late on Friday came a day after the latest
Sino-U.S. talks aimed at resolving the trade dispute ended with
little progress, with tougher U.S. measures expected to kick in
next month that could add more pressure on the Chinese currency.
    President Donald Trump, in an interview with Reuters last
week, had accused China of manipulating its currency to help
cushion the blow from U.S. tariffs on Chinese
imports.
    The PBOC said it was adjusting the way it calculates the
yuan's official midpoint to keep it more stable amid dollar
strength and trade tensions, but gave no details as to how the
new "X" factor is derived.
    With little sign of compromise in the trade talks, most
market watchers had predicted it was only a matter of time
before the yuan tested the closely watched and psychologically
important support level of 7 to the dollar.
    "The move validates our views that yuan devaluation is not a
weapon of the trade war," Mizuho Bank analysts said in a note.
    "It also resonates with our '7-3' stability threshold
hypothesis, which refers to not breaching 7 for dollar-yuan and
FX reserves not falling below $3 trillion."
    Prior to the market opening on Monday, the PBOC lifted its
official yuan midpoint more than expected to 6.8508
per dollar, 202 pips, or 0.3 percent, firmer than the previous
fix of 6.8710 on Friday.
    The guidance rate was 127 pips higher than Reuters' estimate
of 6.8635 per dollar.
    The currency firmed initially in spot trade before swinging
between gains and losses later in the morning.
    The yuan opened onshore trade at 6.8080 per
dollar, the strongest level since Aug.8. It was changing hands
at 6.8116 at midday, 74 pips firmer than the previous late
session close.
    Its offshore counterpart rose to a high of 6.7818,
its strongest since July 31. It traded at 6.8028 as of midday.
    Traders said the policy move had triggered some dollar
selling since Friday night, but gains in the Chinese currency
were capped by bargain hunting for cheaper dollars on Monday as
many saw strong resistance at 6.8 per dollar for now.
    The PBOC introduced the "X" factor in May 2017 when the yuan
was firming against a weaker dollar. But Goldman Sachs said it
has been used in both direction at various times: to slow yuan
gains and to curb yuan losses.
    Traders suspect the PBOC may already have been testing the
waters in recent weeks for a re-activitation of the measure as
the dollar continued to climb. It was last believed to have been
used early this year, when the yuan was firming.
    U.S. policymakers look set to continue raising interest
rates well into next year, supporting the dollar for a while
longer, while China recently started shifting to easier
conditions to shore up slowing economic growth. 
    "How the factor works per se is much less important than the
clear signal sent by the PBOC that it would defend 7.0 at least
in the next couple of months," said Larry Hu, head of greater
China economics at Macquarie in Hong Kong.
    The yuan had appreciated rapidly in the six months after the
counter-cyclical factor was first introduced, Hu said.
    Late gains in offshore markets after the announcement on
Friday spared the currency from an 11th consecutive weekly loss.
But it had already posted the longest such losing streak since
the exchange rate was unified in 1994.
    The yuan also pared some of its losses to the greenback to
4.5 percent year-to-date.
    
    The yuan market at 0404 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.8508   6.871     0.29%
                                       
 Spot yuan          6.8116   6.819     0.11%
                                       
 Divergence from    -0.57%             
 midpoint*                             
 Spot change YTD                       -4.47%
 Spot change since 2005                21.51%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         93.75       93.11     0.7
 Reuters/HKEX                          
 CNH index                             
 Dollar index    95.111      95.146    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    6.8028    0.13%
        *                        
 Offshore              6.863     -0.18%
 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 Kim
Coghill)
  
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