China's yuan erased early losses and firmed on Monday afternoon, supported by suspected intervention by the central bank via yuan-purchases by state-owned banks, traders said. The suspected intervention offset the early losses on the yuan, which were possibly triggered by a Sunday report from Bank for International Settlements (BIS) that capital outflows in Chinese banks in the first quarter of 2015 and weak incentives to hold yuan positions indicated capital may keep trickling out.
Pressure on the currency from fund outflows has increased since the surprise devaluation of the yuan on August 11. "There is a relatively large amount of yuan purchases this morning," said a trader at a foreign bank in Shanghai. "There are signs that the central bank maybe hoping to guide the yuan to around 6.36." The People's Bank of China (PBOC) set the midpoint rate at 6.3709 per dollar prior to market open, 0.02 percent firmer than the previous fix at 6.3719. The spot market opened at 6.3760 per dollar and was changing hands at 6.3699 at midday, 0.08 percent higher than the previous close.
The PBOC has ordered Chinese commercial banks to require their clients to provide justification for purchases of foreign exchange using yuan, and ensure the foreign currency is deposited in offshore accounts or special designated accounts onshore, sources told Reuters on Friday. Traders said they believed that the new instructions on NRA would reduce onshore and offshore arbitrage opportunities and help keep the yuan stable. The offshore yuan was trading 0.5 percent weaker than the onshore spot at 6.4022 per dollar. Offshore one-year non-deliverable forwards contracts, considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.58, or 3.18 percent weaker than Monday's midpoint.
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