August 3, 2018 / 9:52 AM / in 3 months

China state banks seen selling dollars to arrest sharp yuan losses: traders

SHANGHAI (Reuters) - Major state-owned Chinese banks were seen selling dollars on Friday afternoon in an apparent attempt to put a floor under a tumbling yuan, as the worsening trade dispute between the United States and China drove the currency to a fresh 14-month low.

FILE PHOTO: A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration/File Photo

The banks were seen selling dollars at around 6.9 per dollar in the onshore foreign exchange market in afternoon trade, three traders said.

The onshore spot market CNY=CFXS opened at 6.8571 per dollar, weakening to a low of 6.8965 at one point on Friday afternoon, its lowest level since May 15, 2017. It finished domestic trading at 6.8620 at 0830 GMT.

Its offshore counterpart was trading at 6.8968 per dollar as of 0914 GMT.

The yuan is on track to fall for eight consecutive weeks, its longest weekly losing streak since the exchange rate mechanism was unified in 1994.

The currency came under more pressure this week after the administration of U.S. President Donald Trump proposed raising tariffs to 25 percent from 10 percent on $200 billion worth of Chinese imports to the United States.

China vowed to retaliate with higher tariffs of its own, with a Foreign Ministry spokesman saying U.S. efforts at “blackmail” would fail.

A trader at an Asian bank in Shanghai said the Chinese response indicated the trade row was “very severe” and that a long-term depreciation trend in the yuan “should not be ruled out.”

Traders said state-run banks remained active in the dollar-yuan swaps market, although they weren’t entirely sure if they were using swaps to borrow the dollars they were selling in the spot market.

Their heavy swapping of yuan for dollars in forwards in recent weeks has seen the one-year value of the yuan CNYFWDOR= rise above spot levels. On Friday, one-year yuan was quoted around 6.8440 per dollar.

“Big banks have not alleviated their selling pressure in the swap market, despite the onshore spot yuan showing some signs of stabilization earlier this week. It unarguably shows authorities’ attempt to stabilize the yuan from sinking too fast,” said the trader in Shanghai.

The yuan’s rapid depreciation has prompted market talk over the potential for the yuan to breach 7 per dollar in the near term.

A trader at a foreign bank said the state banks’ dollar selling on Friday took place in the last hour before the close of onshore trade, seen as an attempt to stabilize its closing price.

The onshore closing price is used by the central bank to help determine the official midpoint of the yuan’s trading band for the next day of trade.

State-owned banks sold dollars in the forex market regularly in late 2015 and 2016 in what some traders believed was part of official efforts to prop up the yuan.

Reporting by Winni Zhou and Andrew Galbraith; Additional reporting by Vidya Ranganathan in SINGAPORE; Editing by Shri Navaratnam

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