China’s yuan closes down 1 pct, more weakness expected

(Reuters) – China’s yuan extended losses for a second day, closing down 1 percent against the dollar after the People’s Bank of China (PBOC) significantly weakened the midpoint again.

Spot yuan fell to as low as 6.4510 per dollar in afternoon trade, but strengthed sharply toward the close. It rose 0.88 percent during the last minutes of trade, feeding into suspicions the central bank may have intervened via state banks to get the closing quote back into range.

The PBOC set the midpoint rate at 6.3306 per dollar prior to market open, 1.6 percent weaker than the previous fix of 6.2298.

The spot market closed at 6.3870, 639 pips away from the previous close and 0.89 percent away from the midpoint.

The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.

"As long as the gap between fixing and spot remains, the tail chasing game will drive RMB weaker in a slow burn mode. Therefore, the next question is how China can close the gap," said Xie Dongming, an analyst at OCBC Bank.

In a statement on Wednesday before the market open, the PBOC appeared to attempt to reassure anxious investors that this did not mark the beginning of a free fall.

"Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan," the central bank said.

However, economic indicators showed that growth in China’s factory output, investment and retail sales were all weaker than expected in July, adding pressure on Beijing to roll out more measures to prevent a deeper slowdown.

Following the sharp decline of the yuan, some banks have already revised down their forecasts for yuan performance this year, with Societe Generale expecting it to fall to 6.5 per dollar in the third quarter and to 6.6 by the end of the year.

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The International Monetary Fund (IMF) welcomed the decision to make the midpoint more reflective of supply and demand instead of policy goals, seen as a key condition for including the yuan in the IMF’s basket of reserve currencies.

The Chinese authorities will want to appear they are in control, but FX depreciation has already started elsewhere which will offset some of China’s gains in competitiveness such that the process will need to overshoot these initial estimates, Deutsche Bank said in notes to clients on Wednesday.

In the offshore yuan market where the currency can trade more freely, the yuan was trading 2 percent away from the onshore spot at 6.5165 per dollar.

"The wide gap between onshore spot CNY and offshore spot CNH is likely not desired by the PBOC," said Christy Tan, Asian head of markets strategy at National Australia Bank.

"A convergence is an important indication that the Chinese authorities are allowing the CNY to be more flexible and market driven."

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 6.6287, or 4.50 percent firmer than the midpoint. (HONG KONG, Aug 12/2015)

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