China’s yuan rebounds, but set for biggest weekly decline since mid-Sept

SHANGHAI, Jan 7 (Reuters) – China’s yuan bounced off a near three-week low on Friday, but remains set for its biggest weekly decline since mid-September as the U.S. dollar has strengthened across the board due to expectations of early Federal Reserve interest rate hike.

Currency traders said markets were expecting U.S. job payrolls data due later in the session to reinforce expectations for faster monetary tightening in the United States, which would boost dollar and pile pressure on emerging market currencies.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.3742 per dollar, 14 pips weaker than the previous fix at 6.3728.

In the spot market, the onshore yuan bounced from a near three week low of 6.3832 per dollar and changed hands at 6.3760 at midday, 70 pips away from the previous late session close.

If the yuan finishes the domestic session at the midday level it would notch the worst weekly performance in nearly four month by depreciating 0.33% against the dollar.

Traders attributed the rebound in the yuan on Friday morning to continued corporate FX conversion into the yuan for various payments ahead of the Lunar New Year holiday, which falls on Jan. 31 to Feb. 6 this year.

While some market analysts expect the yuan to ease and start tracking broad dollar strength after the long holiday, Ming Ming, chief economist at Citic Securities argued that exports would be a key factor determining how the yuan fares when the Fed does eventually tighten.

“If the global supply chain improves in the second half of this year and demand returns to normal … China’s exports may weaken and overseas monetary policy will become the dominant factor driving the yuan’s movements,” he said in a note.

Ming added that narrowing yield gap between China and the United States could affect the timing for the PBOC to ease its monetary policy but is unlikely to reverse foreign buying of Chinese bonds.

Markets widely believe that China’s central bank will replenish liquidity shortfalls again before the Lunar New Year holiday, though investors remain split on whether more monetary easing was imminent in the world’s second-largest economy. read more

By midday, the global dollar index (.DXY) stood at 96.224, while the offshore yuan was trading at 6.3844 per dollar.

The yuan market at 0403 GMT:

ONSHORE SPOT:

Key indexes:

*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

*Premium for offshore spot over onshore

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

Reporting by Winni Zhou and Andrew Galbraith; Editing by Simon Cameron-Moore

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