China's yuan
weakened slightly on Thursday to a fresh 4-year low, but the pace of
decline eased after the central bank signaled it believes the yuan has
found its proper new level.
The People's Bank of China set the midpoint rate CNY=SAEC
at 6.4010 per dollar prior to market open, weaker than the previous fix
of 6.3306 but near the prior market close, following through on its
commitment to set the midpoint with a closer eye on the previous day's
closing rate, seen as making the fixing more responsive to market
forces.
The spot market CNY=CFXS opened at 6.3880 per dollar and was changing hands at 6.4085 at midday, 215 pips away from the previous close and 0.12 percent away from the midpoint - the closest it has been to the midpoint since November 2014.
"I think the range around 6.3 to 6.49 is acceptable for the central bank, and they may hope to fix the yuan in this range, seeing the messages they announced today given that some major banks tried to prop up the market at yesterday's close," said a forex trader at a Japanese bank in Shanghai.
The central bank is trying hard to stabilize the yuan so the major banks are very likely to follow its signals.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day, and had been trading far weaker than the midpoint for months until Tuesday's sudden adjustment.
Central bank officials denied suggestions that they were preparing to push the currency down 10 percent in order to support exports, and they said the impact of the devaluation on the Hong Kong offshore yuan market was negligible, arguing that it was positive for the internationalization of the currency.
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 6.5525, some 2.31 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.
As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.
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| A customer holds a 100 Yuan note at a market in Beijing, August 12, 2015. |
The spot market CNY=CFXS opened at 6.3880 per dollar and was changing hands at 6.4085 at midday, 215 pips away from the previous close and 0.12 percent away from the midpoint - the closest it has been to the midpoint since November 2014.
"I think the range around 6.3 to 6.49 is acceptable for the central bank, and they may hope to fix the yuan in this range, seeing the messages they announced today given that some major banks tried to prop up the market at yesterday's close," said a forex trader at a Japanese bank in Shanghai.
The central bank is trying hard to stabilize the yuan so the major banks are very likely to follow its signals.
The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day, and had been trading far weaker than the midpoint for months until Tuesday's sudden adjustment.
Central bank officials denied suggestions that they were preparing to push the currency down 10 percent in order to support exports, and they said the impact of the devaluation on the Hong Kong offshore yuan market was negligible, arguing that it was positive for the internationalization of the currency.
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 6.5525, some 2.31 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate, and now that the trading band has been widened to 2 percent in either direction, corporates are much warier of using the NDF to hedge given the basis risk inherent in them.
As a result the market has lost liquidity in recent years and has frequently proven an unreliable measure of market sentiment.
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