China’s yuan firmed slightly against the dollar on Wednesday, in part supported by corporate dollar sales after the greenback climbed to one-week highs overnight in global markets. Traders said the market took in stride the larger-than-expected fall in China’s foreign exchange reserves reported on Tuesday, noting that outflows appeared to be easing. Prior to market open, the official yuan midpoint, guided by the People’s Bank of China, was fixed at 6.8849 per dollar, the weakest in three weeks, 0.36 percent softer than the previous fix of 6.8604. The softer midpoint reflected gains in the dollar. The greenback is benefiting from technical buying after recent losses and from mounting political uncertainty ahead of a number of crucial elections in Europe.
WATCH VIDEO | UP Elections 2017: Muzaffarnagar Revisited
Traders said a stronger dollar quickly attracted companies to sell their holdings of the currency. Spot yuan opened at 6.8855 per dollar and was changing hands at 6.8843 by midday, 18 pips firmer than the previous late session close and 0.01 percent stronger than the midpoint. “The market was balanced in the morning with companies spontaneously selling some dollar positions,” said a trader at a Chinese bank, noting state banks did not emerge in the market to offer dollar liquidity. State-owned banks offered dollar liquidity regularly late last year in what traders believe was part of efforts to support the Chinese yuan from falling too fast.
Traders said companies sold dollars to lock in profits as it was doubtful if gains would be sustainable after recent volatility due to uncertainties over U.S. President Donald Trump’s protectionist trade policies and approach to geopolitics. President Trump told the Wall Street Journal last month that the dollar was “too strong”. China’s foreign exchange reserves fell below the closely watched $3 trillion level in January for the first time in nearly six years, though tighter regulatory controls appear to have slowed capital outflows. Reserves fell $12.3 billion to $2.998 trillion, more than the $10.5 billion economists polled by Reuters had expected.
“By taking account of favorable currency revaluation effects, a bigger actual drop of around USD 35-40bn according to our estimate, indicates persistent capital outflows in January when the dollar retreated broadly,” Gao Qi, a Singapore-based FX strategist at Scotia Bank, wrote in a note. Many market watchers expect Beijing to continue its policy of containing outflows this year. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.36, weaker than the previous day’s 95.51. The global dollar index rose to 100.34 from the previous close of 100.26.
The spread between onshore and offshore yuan narrowed to around 400 pips on Wednesday morning, with the offshore spot trading 0.66 percent firmer than the onshore spot at 6.8389 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 7.0965, 2.98 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.