August 30, 2018 / 4:59 AM / 3 months ago

Yuan weakens, erasing gains made after revival of X-factor

SHANGHAI (Reuters) - China’s yuan fell on Thursday amid heavy corporate demand for dollars, erasing all of the gains it had made this week following the central bank’s latest move to stabilize the currency.

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

The yuan jumped late on Friday after the central bank said it had reactivated a “counter-cyclical” factor in the calculations for its daily official guidance rate, but traders said the focus was now shifting back to the bearish outlook.

China is bracing for more sweeping U.S. tariffs on its goods which are expected to go into effect later next month, putting more pressure on its cooling economy and currency. A factory survey on Friday is expected to show growth in the sector eased for the third month in row in August.

Prior to the market opening on Thursday, the PBOC set the midpoint rate CNY=PBOC at 6.8113 per dollar, 41 pips or 0.06 percent weaker than the previous fix of 6.8072.

The guidance rate was 48 pips weaker than Reuters’ estimate of 6.8065 per dollar.

The change in the PBOC’s methodology was seen as a further sign that Chinese authorities did not want the yuan to keep weakening after a record 10 straight weeks of losses that had rattled global financial markets.

But traders said the newly reinstated “counter-cyclical” factor has not played a leading role in affecting the official midpoint fixing this week.

A senior FX analyst at a major Chinese bank attributed the rebound in the spot yuan earlier this week to a weaker dollar and a psychological knee-jerk reaction to the PBOC’s announcement.

“The market, sooner or later, will realize that the authorities have not firmly stepped in,” he said.

“Some investors, especially those who do not have strong confidence in the yuan, might take it in the way that authorities do not have a firm determination to beat yuan bears. They could then take the advantage of yuan’s rebound to increase their dollar buying.”

The yuan appreciated rapidly in the six months after the counter-cyclical factor was first introduced in late May 2017. The PBOC had suspended it early this year.

In the spot market, the onshore yuan CNY=CFXS opened at 6.8237 per dollar and was changing hands at 6.8304 at midday, 99 pips weaker than the previous late session close and 0.28 percent softer than the midpoint.

The midday level was well below last Friday’s late night close of 6.8190, stamping out all of the gains since the PBOC’s announcement.

“With the Trump administration expected to raise tariffs on $200 billion of Chinese goods (in September), the yuan and other emerging market currencies could become under threat to heavy losses if risk aversion makes an unwelcome return,” Lukman Otunuga, research analyst at FXTM said in a note.

The deadline for public comment on U.S. President Donald Trump’s increased tariffs is on Sept. 5.

The Thomson Reuters/HKEX Global CNH index .RXYH, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.34, weaker than the previous day’s 93.49.

The global dollar index .DXY fell to 94.576 from the previous close of 94.6.

The offshore yuan CNH=D3 was trading 0.03 percent weaker than the onshore spot at 6.8326 per dollar.

Offshore one-year non-deliverable forwards contracts (NDFs)CNY1YNDFOR=, considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.886, 1.08 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0402 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.8113 6.8072 -0.06%

CNY=SAEC

Spot yuan 6.8304 6.8205 -0.14%

CNY=CFXS

Divergence from 0.28%

midpoint*

Spot change YTD -4.74%

Spot change since 2005 21.17%

revaluation

Key indexes:

Item Current Previous Change

Thomson 93.34 93.49 -0.2

Reuters/HKEX

CNH index

Dollar index 94.576 94.6 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 6.8326 -0.03%

CNH= *

Offshore 6.886 -1.08%

non-deliverable

forwards

CNY1YNDFOR= **

*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC.

Reporting by Winni Zhou and John Ruwitch; Editing by Kim Coghill

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