China's yuan falls

China's yuan fell against the US dollar on Monday after the central bank set a weaker midpoint to reflect global dollar strength, but traders said room for depreciation is expected to be limited as the threat of a trade war from the US lingers. The People's Bank of China set the midpoint rate at 6.8814 per dollar prior to the market open, weaker than the previous fix 6.8655.
In the spot market, the yuan opened at 6.8762 per dollar and was changing hands at 6.8752 at midday, 52 pips weaker than the previous late session close and 0.09 percent stronger than the midpoint. "The demand for and supply of dollars is quite balanced in the market," said a trader at a Chinese bank in Shanghai. "Trump's comments last week hasn't had any impact on the market and we are only monitoring where the PBOC wants the yuan to move," the trader said.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.04, weaker than the previous day's 95.06. The global dollar index rose to 101.15 from the previous close of 101.09. Bets on the yuan have turned slightly bearish, but positioning was still close to being neutral, a recent Reuters poll of 16 market participants showed.
The offshore yuan was trading 0.21 percent stronger than the onshore spot at 6.861 per dollar. But, reflecting still bearish views on the currency in global markets, offshore one-year non-deliverable forwards contracts (NDFs) traded at 7.095, 3.01 percent weaker than the midpoint. Offshore forwards are considered the best available proxy for forward-looking market expectations of the yuan's value. One-year NDFs are settled against the midpoint, not the spot rate.
US President Donald Trump declared China the "grand champions" of currency manipulation on Thursday, just hours after his new Treasury secretary pledged a more methodical approach to analysing Beijing's foreign exchange practices. The threat of a trade row from the US limits the room for China to allow further yuan depreciation, supporting the view that the period of one-way depreciation has ended, Macquarie analysts said in a report on Monday.
Authorities are also expected to keep the yuan relatively steady heading into the annual meeting of China's parliament next month, as it typically does during high-profile political events. Pan Gonsheng, head of the State Administration of Foreign Exchange (SAFE), said that it will strengthen supervision of the foreign exchange market in 2017. China's foreign exchange market is relatively stable and cross-border capital flows are becoming more balanced, according to a statement posted on its website.