China's yuan slipped to a more than six-month low against the U.S. dollar on Thursday, after the country's central bank set a weaker daily midpoint, as corporate dollar buying and expectations of U.S. policy tightening supported the greenback.
Traders said a sharp weakening in the yuan's offshore counterpart, which also hit a more than six-month low, suggested growing expectations of yuan depreciation, which could drag the onshore yuan still lower.
The spread between the offshore and onshore yuan has widened to around 220 pips from just 7 pips two weeks ago. "The trend of the yuan is to weaken, but we have to see how the central bank reacts," said a trader at a Chinese bank. Another trader at a Chinese bank said that expectations for yuan depreciation had accelerated after the USD/CNY pair rose about its 200-day moving average, and that greater volatility is likely.
The dollar remains near its strongest in more than two years against a basket of peers as U.S. yields march higher amid expectations of more-aggressive tightening by the Federal Reserve. Reflecting dollar strength, the People's Bank of China (PBOC) set the yuan's daily midpoint at 6.4098 per dollar early on Thursday, its weakest since Nov. 11.
However, that level was stronger than market forecasts. Spot yuan opened at 6.4150 per dollar before weakening to a low of 6.4449 per dollar, its weakest level since Oct. 13. By midday, it was changing hands at 6.4388 per dollar, 188 pips softer than Wednesday's late session close. The offshore yuan slipped to a low of 6.4668 per dollar, its weakest since Oct. 6, and stood at 6.4619 per dollar by midday.
"Over the past few sessions, USDCNH has broken out of a gentle falling wedge and risks have tilted to the upside with a potential for a new trend emerging," analysts at Maybank said in a note, flagging resistance at 6.4950. Analysts at Tianfeng Securities said that with U.S. real yields near positive territory, the dollar index could strengthen in the 100-105 range before the end of May.
The gap between COVID-19 control strategies inside and outside of China could also weigh on trade and the yuan's exchange rate, they said. The global dollar index was last at 100.558 from Wednesday's close of 100.39. 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 6.538. One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 4:05AM GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.4098 6.3996 -0.16% Spot yuan 6.4388 6.42 -0.29% Divergence from 0.45% midpoint* Spot change YTD -1.30% Spot change since 2005 28.54% revaluation Key indexes: Item Current Previous Change Thomson 104.37 104.46 -0.1 Reuters/HKEX CNH index Dollar index 100.558 100.39 0.2 *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 6.4619 -0.36% * Offshore 6.538 -1.96% non-deliverable forwards ** *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 Andrew Galbraith and Jindong Zhang; Editing by Jacqueline Wong)