Traders mind the rate gap as yuan steadies ahead of Trump-Xi talks
SHANGHAI, Nov 21 (Reuters) - China's yuan was little changedagainst the dollar on Wednesday as corporate dollar sellingoffset the drag from a weaker official midpoint.
Traders expect the yuan will be kept relatively steady aheadof a high-stakes meeting between U.S. President Donald Trump andChinese President Xi Jinping at the end of the month.
Just a few weeks ago markets had hoped the meeting may openthe way to a de-escalation in the Sino-U.S. trade war, but theTrump administration has ramped up its rhetoric in recent days,saying Beijing has not changed its "unfair" practices at theheart of the dispute. The dollar steadied against a basket of six othermajor currencies on Wednesday after a rise overnight.
It has been under pressure for most of this week as cautiouscomments by Federal Reserve officials and surprisingly weak U.S.economic data suggested the central bank could slow the pace ofmonetary policy tightening. Traders said the recent weakness in the greenback triggeredcorporate dollar selling in early trade after the spot marketopened below the psychologically important 6.95 per dollarlevel.
Prior to the market opening on Wednesday, the People's Bankof China (PBOC) set the midpoint rate at 6.9449 perdollar, 169 pips or 0.24 percent weaker than the previous fix of6.928.
In the spot market, the onshore yuan opened at6.9510 per dollar and was changing hands at 6.9448 at midday,only 7 pips firmer than the previous late session close.
Although the yuan has pulled back from near decade lows inlate October, market participants said depreciation pressure hasnot fully eased.
A recent narrowing in interest rate gaps between China andUnited States, if sustained, is expected to put renewed pressureon the yuan in the long run.
"It has not affected intraday trade yet, but shrinkinginterest rate gaps will surely bring depreciation pressure,"said a second trader at a Chinese bank.
Yields on less actively traded 1-year Chinese governmentsecurities have already fallen below the U.S. Treasury notes,but the interest gap between the mostly watched benchmark10-year treasuriesremained positive onWednesday.
Ming Ming, a former PBOC official and head of fixed incomeresearch at Citic Securities in Beijing, said inverted yieldsbetween China and the United States reflected the two countries'different economic cycles.
Ming said the chance of a negative yield gap could not beruled out next year and it could even "widen further".
"The interest rate is only one of the factors deciding theexchange rate. In general, the yield gap between China and theUnited States is not the most important factor. The key remainsthe domestic economy and the dollar's movement," Ming said.
"The domestic market is more affected by economic growth andits expectations ... It is putting the cart before the horse totighten liquidity or even raise interest rate if the yields(between China and the United States) invert."
Ming sees room for further monetary policy easing in China,including reductions in banks' reserve requirement ratios (RRR)and the benchmark interest rate.
Speculation about whether authorities are considering abenchmark rate cut has started to swirl in the past week amidwidespread expectations that economic conditions in China willget worse before they get better. "We see further pressure on the yuan in early 2019,"
Louis Kuijs, head of Asia economics at Oxford Economics said ina note on Wednesday.
But he added that pressure on the yuan should start to easelater in the year as China's policy easing measures begin tosteady the economy and slowing U.S. growth leads to a weakerdollar.
Kuijs expects China's downturn to bottom out around thesecond quarter next year, but is forecasting full-year 2019growth will weaken to 6 percent from an expected 6.5 percentthis year.
The global dollar index fell to 96.822 from theprevious close of 96.836.
The offshore yuan was trading at 6.9415 per dollarat midday.
The yuan market at 0423 GMT:
ONSHORE SPOT: Item CurrentPreviousChange PBOC midpoint6.9449 6.928 -0.24% Spot yuan6.9448 6.94550.01% Divergence from0.00%
midpoint*
Spot change YTD -6.31% Spot change since 200519.18% revaluation
Key indexes:
ItemCurrent PreviousChange
Thomson 92.91 92.59 0.3 Reuters/HKEX
CNH index
Dollar index96.82296.8360.0
*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 yuan6.94150.05%
*
Offshore7.0043-0.85% 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 KimCoghill)
Messaging: winni.zhou.thomsonreuters.com@reuters.net)) Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication. |