China's yuan eases on dollar demand, Moody's downgrade shrugged off

SHANGHAI: China's yuan eased against the US dollar on Wednesday on some corporate demand for the greenback, while traders shrugged off rating agency Moody's decision to cut its sovereign rating on China.

Moody's Investors Service downgraded China's long-term local and foreign currency issuer ratings on Wednesday, citing expectations the financial strength of the world's second-biggest economy would erode in the coming years.

The offshore yuan slipped on the Moody's news, but later recovered the loss.

Onshore - unlike offshore - the downgrade was shrugged off by many traders.

"The onshore (forex) market did not pay much attention to such news," said one trader at a Chinese bank in Shanghai.

Others agreed, saying the onshore market is mainly driven by the demand for dollars.

The People's Bank of China set the midpoint rate at 6.8758 per dollar prior to market open, weaker than the previous fix of 6.8661.

As has been the case for weeks, the fixing of the official guidance rate was firmer than the market had expected.

ANZ, in a note, wrote that Wednesday's "much stronger than expected fixing is likely an attempt to contain the FX impact from the downgrade".

In the spot market, the onshore yuan opened at 6.8935 per dollar and was changing hands at 6.8925 at midday, 35 pips weaker than the previous late session close and 0.24 percent softer than the midpoint.

The morning loss stemmed from slightly heavier dollar demand by companies, traders said, adding both foreign and domestic

companies traditionally have increased demand before the end of June.

The yuan likely will keep trading in a range of 6.88 to 6.91 per dollar, market players forecast, as banks and companies, who are the key players in the domestic market, would purchase the dollar when the yuan strengthens to the lower end of the range while liquidating positions when it weakens.

On Wednesday morning, the offshore yuan briefly dipped to a low of 6.8901 per dollar on the Moody's decision, but then recovered and traded at 6.8835 at midday, 0.06 percent weaker than the previous close.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.37, firmer than the previous day's 93.18.

The global dollar index rose to 97.402 from the previous close of 97.351.

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 7.0855, 2.96 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.