China's yuan inches up on dollar selling, may gain for first day in four

SHANGHAI: China's yuan firmed slightly against the US dollar on Wednesday and looked set to strengthen for the first time in four days, supported by corporate dollar selling.

Tighter liquidity in offshore markets also supported the currency, though traders continued to debate the impact of several moves by the central bank in recent days which may reflect growing official concerns about the yuan's recent sharp gains.

Prior to the market opening on Wednesday, the People's Bank of China lowered its official yuan midpoint for a second straight day to 6.5382 per dollar. It had set a higher midpoint for 11 sessions straight through Friday.

The midpoint was 105 pips or 0.16 percent weaker than Tuesday's fix of 6.5277. Traders said the dollar/yuan fixing came in higher than their models had suggested, similar to the last few sessions.

But the weaker fixing has little impact on spot trade.

The yuan opened at 6.5315 per dollar and was changing hands at 6.5286 at midday, 76 pips firmer than the previous late session close and 0.15 percent stronger than the midpoint.

Three straight days of losses from Friday to Tuesday was prompting some companies to liquidate dollar positions, traders said.

"There is no clear direction for the yuan, and that is exactly what the central bank wants after the policy relaxation over the weekend," said a chief dealer at a foreign bank in Shanghai.

With capital outflows easing and perhaps even turning into inflows, and some exporters starting to complain of losses from the yuan's recent strong run-up, some market watchers believe authorities are now willing to allow increased two-way volatility in the currency.

At one point last week, the yuan had appreciated more than 7 percent this year against the faltering dollar, with much of the gains seen in just the last few months.

On Monday, China's central bank scrapped two measures that were put in place to support the yuan when it was under significant selling pressure, suggesting Beijing is anxious to quash one-way bets on the yuan rising further.

The offshore yuan also lent some support to its onshore counterpart.

The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), set by the city's Treasury Markets Association, rose to 3.04983 percent for overnight contracts, more than 95 percentage points higher than the previous fix of 2.09567 percent. Wednesday's fix was also the highest since June 5.

However, the Shanghai Interbank Offered Rate (SHIBOR) for overnight contract edged up only 0.17 basis points on Wednesday to 2.65 percent.

A rise in funding costs in Hong Kong suggested a tightening in the yuan liquidity offshore as the yuan comes back into favour for investors, which could shore up the Chinese currency amid rising costs for speculators to short the yuan.

As of midday, the offshore spot was trading 0.01 percent firmer than the onshore spot at 6.5278 per dollar.

"We believe that the PBoC's policy change was not to fundamentally alter the long-term trend of the RMB, but only to stabilize the short-term fluctuation," Alicia Garcia Herrero, chief economist in Asia Pacific at Natixis said in a note, keeping the view that the yuan will "ease gradually in the longer term".

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.03, firmer than the previous day's 95.82.

The global dollar index fell to 91.78 from the previous close of 91.882.

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 6.6424, 1.57 percent weaker than the midpoint.

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