China's yuan weakens to 22-mth low, traders eye 7 barrier
SHANGHAI, Oct 26 (Reuters) - China's yuan hit a fresh22-month low against the dollar on Friday, as aweaker-than-expected central bank fixing ramped up market viewsthat authorities would allow larger declines in the currency.
The move lower follows broad dollar strength as the eurofell after the European Central Bank failed to convince marketsthat its rates would rise, while expectations of gradual U.S.Federal Reserve tightening continued to support the greenback. Traders increasingly expect the yuan will face downwardpressure in coming months and could breach 7 per dollar, a levellast seen during global financial crisis.
They say the heavy losses in the yuan on Friday followedweaker official guidance rate and a rising dollar.
"Frankly, the fixes are becoming less ambiguous than everand are being interpreted as an open invitation to push the(offshore yuan) envelope higher," Stephen Innes, head of tradingfor Asia Pacific at OANDA in Singapore, wrote in a note.
Prior to market opening on Friday, the People's Bank ofChina set the midpoint rate at 6.951 per dollar, 101pips or 0.15 percent weaker than the previous fix of 6.9409.
Friday's fixing was weaker than market forecasts, as tradershad expected the guidance rate to come in above 6.95, a levelmarket had once believed the central bank would firmly guard.
At midday, the onshore rate was changing hands at6.9611 per dollar, 119 pips weaker than the previous latesession close. If it finishes the late night session at themidday level, it would become its third straight weekly loss.
It opened at 6.9530 and shot past the key 6.96 to a low of6.9647 at one point, its lowest since Dec. 28, 2016.
A trader at a Chinese bank said significant downwardpressure on the yuan followed the dollar's recent rallies, andthat "the authorities may allow some weakness in the yuan now."
However, Gao Qi, FX strategist at Scotiabank in Singapore,said policymakers need a relatively steady yuan to bolsterA-Shares, which have been battered by mounting risks due toshare-pledged loans. "When the risks from share-backed loans are mitigatedproperly and eliminated finally, USD/CNY and USD/CNH will likelybe allowed to rally through 7.00 in an orderly way particularlyif the dollar strengthens across the board and if the U.S.-Chinatensions escalate further," he said in a note.
In the offshore market, the yuan was trading at6.9725 per dollar at midday.
Chinese A-shares fell on Friday morning in choppy trade asinvestor excitement over government support measures faded. The yuan market at 0450 GMT:
ONSHORE SPOT: Item CurrentPreviousChange PBOC midpoint6.9516.9409-0.15% Spot yuan6.9611 6.9492-0.17% Divergence from0.15%
midpoint*
Spot change YTD -6.52% Spot change since 200518.90% revaluation
Key indexes:
ItemCurrent PreviousChange
Thomson 92.73 92.73 0.0 Reuters/HKEX
CNH index
Dollar index96.65196.6790.0
*Divergence of the dollar/yuan exchange rate. Negative numberindicates that spot yuan is trading stronger than the midpoint.The People's Bank of China (PBOC) allows the exchange rate torise or fall 2 percent from official midpoint rate it sets eachmorning.OFFSHORE CNH MARKET
InstrumentCurrent Difference from onshore Offshore spot yuan6.9725-0.16%
*
Offshore7.059 -1.53% 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 Winni Zhou and John Ruwitch; Editing by SamHolmes)
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