August 24, 2018 / 9:15 AM / 8 months ago

Yuan flirts with record 11th losing week as more US tariffs loom

(Updates with domestic closing price, analyst quotes)

SHANGHAI, Aug 24 (Reuters) - China’s yuan was at risk of suffering its 11th straight weekly loss on Friday, weighed by a much weaker official midpoint and disappointment that there were no signs of progress in trade talks between Washington and Beijing.

An unexpected injection of medium-term funds by China’s central bank also added to downward pressure on the yuan, as policymakers shift to easier credit policies and fiscal stimulus to support the cooling economy.

U.S. and Chinese officials ended two days of talks on Thursday, with no major breakthrough as their trade war escalated with activation of another round of dueling tariffs on $16 billion worth of each country’s goods.

While no deal had been expected by markets, the focus is now shifting to far more sweeping U.S. tariffs, on another $200 billion of Chinese goods, which are expected to go into effect in late September.

At that point, Beijing would have little scope to match any more U.S. measures on a dollar-for-dollar basis, as China imports fewer American goods. That is fuelling worries Beijing may resort to other forms of retaliation, ranging from actions against U.S. firms in China to allowing the yuan to weaken further.

The yuan has shed nearly 9 percent to the greenback since the end of March, though losses have slowed recently after the central bank took steps to make shorting the currency more expensive.

“It might be difficult to obtain a positive resolution on Sino-U.S. trade issues in the near term. Any further worsening from here should further favour the USD against the EM Asian currencies,” Terence Wu, FX strategist at OCBC Bank said in a note.

Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.8710 per dollar, largely matching forecasts but 343 pips or 0.5 percent weaker than the previous fix of 6.8367.

The move was the biggest one-day weakening in the official midpoint since Aug.3.

In the spot market, the onshore yuan opened at 6.8735 per dollar and closed domestic trade at 6.8789 at 0830 GMT, 40 pips weaker than the previous late night session.

If the yuan finishes the late night session at such a level, it would have gained 0.1 percent for the week.

If it dips, the yuan will have extended its longest weekly losing streak since the exchange rate was unified in 1994.

Traders said dollar demand was strong on Friday. But they added that the market grew cautious as the spot rate approached 6.9 per dollar. Players are wary that state banks may step to sell dollars to prevent the yuan from hitting the psychologically critical 7 mark.

A trader at a foreign bank pointed out some of the recent counter-cyclical measures were rolled out at around 6.9 per dollar, making it a strong resistance for the market for now.

“Against the backdrop of rising uncertainties, we believe that China’s central bank is likely to stay vigilant,” said Zhou Hao, analyst at Commerzbank in Singapore.

Zhou does not expect the yuan to “blow up in the foreseeable future” as Chinese government has a “very strong” influence over the economy and the FX market, he added.

On Thursday, four traders told Reuters that major state-owned Chinese banks were seen swapping yuan for dollars in forwards.

One of the traders said the state banks were “loading up” their dollar positions to have them on hand without consuming foreign exchange reserves.

Some market participants were also focusing on the Federal Reserve’s annual central bankers’ conference in Jackson Hole, Wyoming, for clues on further U.S. monetary tightening and the outlook for the dollar. The meeting is due to wrap up later on Friday.

Ample liquidity in China’s interbank money market also pressured the yuan.

The PBOC unexpectedly lent 149 billion yuan ($21.68 billion) to financial institutions via its one-year medium-term lending facility (MLF) on Friday, with rates unchanged.

$1 = 6.8740 Chinese yuan Reporting by Winni Zhou and John Ruwitch; Editing by Kim Coghill

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